Ending the microfoundations hegemony

The New Classical Counter Revolution changed macromodelling methodology and ushered in the hegemony of microfounded models. Yet, in reality, at any particular point in time there is a trade-off between data coherence and theoretical coherence, and insisting that all academically respectable modelling should be at one extreme of this trade-off is a major mistake. The paper argues that if more traditional structural econometric models (SEMs) had been developed alongside microfounded models, links between finance and the real economy would have been more thoroughly explored before the financial crisis, allowing macroeconomists to respond better to the Great Recession. Just as microfoundations hegemony held back macroeconomics on that occasion, it is likely to do so again. Macroeconomics will develop more rapidly in useful directions if microfounded models and more traditional SEMs work alongside each other, and are accorded equal academic respect.