Must-Read: Claudia Sahm: Telling Macro Stories with Micro:
Economists are avid storytellers….
A good story paper in economics, according to David Romer, has three characteristics: a viewpoint, a lever, and a result…. Blog or media coverage… focuses on the result…. Economists… spend more time on the lever, the how-did-they-get-the-result part…. The viewpoint matters… but it usually holds across many papers.
Best to focus the new stuff. Except when the viewpoint comes under scrutiny, then the stories can really change…. One long-standing viewpoint in economics is that changes in the macro-economy can largely be understood by studying changes in macro aggregates. Ironically, this viewpoint even survived macro’s push to micro foundations with a “representative agent” stepping in as the missing link between aggregate data and micro theory…. An ever-growing body of research and commentary is helping to identify times when differences at the micro level are relevant for macro outcomes….
In the past nine years, have seen models that condition on aggregate measures of income, wealth, interest rates, sentiment, and credit conditions do a pretty good job explaining the changes in aggregate consumer spending…. Adding micro heterogeneity to macro models is one in a long list of possible improvements. Adding a more realistic financial sector, exploring non-linearities, relaxing rational expectations, and extracting a better signal from noisy aggregate data are all in the queue too…. I suspect the Representative Agent is not getting voted off macro island any time soon….
Economics is not supposed to be about economists, but sometimes our stories can feel that way, especially to non economists. And to be fair, the viewpoints that economists bring to their work do have an impact on the results, if nothing else by what we choose to study…