The Macro Pedagogy Debate: Teaching DSGE to Undergraduates Symposium

ABSTRACT

Introducing DSGE modelling into undergraduate macroeconomics would be a mistake. DSGE modelling hasn't served the profession well, and won't enhance an undergraduate curriculum that is overwhelmingly populated by students who don't intend to pursue graduate training in economics. Undergraduate macro would be better served by focusing on basic tools and concepts, and by conveying to students a sense of the economy's complexity and the challenges this presents to good policy making.

KEYWORDS:

• DSGE modelling
• undergraduate macroeconomics
• problems with modern macroeconomics
• macroeconomic policy

JEL codes:

• A22
• E10
• E60

Acknowledgments

The author thanks an anonymous referee for helpful comments on an earlier draft.

Notes

1. Some contemporary textbooks, such as Jones (2016), include material on micro-foundations and even DSGE models, but without abandoning frameworks such as AS-AD analysis. So the traditional “workhorse” models and approaches based on micro-foundations aren't a strict either/or choice when it comes to teaching undergraduate macro.

2. See D. Romer (2000) and O'Donnell and Rogers (2016) for just two recent examples of criticisms, from qualitatively different theoretical positions, of the IS-LM framework and its role in macro education.

3. Advocates may object that DSGE models are now being adequately “patched up” with monetary features. For example, Benes, Kumhof, and Laxton (2014) introduce banks with credit-money-creating powers into a DSGE framework, allowing for the possible accumulation of financial imbalances that may, in turn, require the use of macroprudential policies. But many of these ad hoc extensions are conceptually at odds with the barter foundations of the DSGE approach (Rogers 2015, 2018).

4. Keating and Valcarcel (2017) suggest that the reduction in macroeconomic volatility during the Great Moderation was both modest by comparison with the drop in volatility immediately after WWII, and statistically insignificant. Crowley and Hughes Hallett (2014) argue that the Great Moderation was an illusion caused by a change in the statistical composition of aggregate volatility, while Assa (2017) accredits the phenomenon to changes in the definition of value-added that “financialized” national income accounting and concealed “volatility as usual” during the post-1980 period.

5. See Kirman (1989, 1992). Note also that as with the monetary and financial features that were originally missing from DSGE models, heterogeneity is something that many DSGE practitioners believe can be “added as required” to DSGE models (see, for example, Chari and Kehoe 2008). Whether this suffices to fully and properly engage the topic is doubtful. In Solis-Garcia's undergraduate syllabus, for example, heterogeneity is treated as something of second-order significance, excluded by virtue of time constraints. It is, instead, both an obvious and important feature of reality for macroeconomists to contemplate.

6. See www.post-crasheconomics.com/.

7. See Denis (2009) on the case of economics.