Evening Must Read: Simon Wren-Lewis: More on the “Microfoundations” Dialogue

Even from Maui, Mark Thoma * continues to direct me to very interesting things–in this case: *Simon Wren Lewis: More on the illusion of superiority:

An ad hoc but data-inspired modification to a microfounded model (what I call an eclectic model) can produce a better model than a fully microfounded model…. But what about the Lucas critique? Surely that says that only a microfounded model can avoid the Lucas critique…. A misspecified model can produce bad policy. These misspecification errors may far outweigh any errors due to the Lucas critique…. Tony’s position is that policymakers in a hurry can do this eclectic stuff, but we academics should just focus on building better microfoundations…. First, building better microfoundations can take a very long time. Second, there is a great deal that academics can say using eclectic, or useful, models…. Go back to the 1970s…. Microfoundations modellers… said price rigidity should not be in macromodels because it was not microfounded…. [If] policymakers in the 1970s… wanted to devalue their currency because they felt it had become overvalued after a temporary burst of domestic inflation… microfounded models would have said there was no point…. Those using eclectic models with ad hoc price rigidities would have known better…. Should academic macroeconomists in the 1970s have left these policymakers to their own devices?… The idea that the only proper way to do macro that involves theory is to work with fully microfounded DSGE models is simply wrong…. If our DSGE models were pretty good descriptions of the world then this misconception might not matter too much, but the real world keeps reminding us that they are not.”