Where Modern Macroeconomics Went Wrong
by Joseph E. Stiglitz – September 2017
National Bureau of Economic Research, Working Paper Series
This paper provides a critique of the DSGE models that have come to dominate macroeconomics
during the past quarter-century. It argues that at the heart of the failure were the wrong
microfoundations, which failed to incorporate key aspects of economic behaviour, e.g.
incorporating insights from information economics and behavioural economics. Inadequate
modelling of the financial sector meant they were ill-suited for predicting or responding to a
financial crisis; and a reliance on representative agent models meant they were ill-suited for
analysing either the role of distribution in fluctuations and crises or the consequences of
fluctuations on inequality. The paper proposes alternative benchmark models that may be more
useful both in understanding deep downturns and responding to them.