Microeconomic Foundations Of Macroeconomic Theory

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Whither the Microeconomic Foundations of Macroeconomic Theory? Introduction The ubiquitous DSGE line of research had been a core area of focus even before the economic crunch and crisis. The economic crisis brought with it major concerns from people in all classes and sorts of life including the Nobel Laureates. They mainly pose disapproval and anxieties about the ruling research paradigm in all cases of micro and macroeconomics. Before the 2007-2009 crisis, the major microeconomic model that was used was the Keynesian-neoclassical synthesis. The economists at the time believed that the free market economy needed continuous stabilization and regulation to achieve an acceptable equilibrium. On the other hand, other economists like Cassel and…show more content…
The first fault in the use of the paradigm is the representative agent. The defect limits one from using aggregate demand functions appropriately even if one needs to build the functions from the rational individual households. Another major flaw in the microeconomics is rational expectations. Expectations such as complete markets and market clearing coincide with the mathematical expectations of a true and rational model of economy hence making it hard to understand and track the major economic functions. A good market model requires that all goods and services must have buyers. The consumers balance the market economy bringing an…show more content…
The hypothesis when combined with the rational expectations makes it an axiom. The occurrence of the economic downturn led to the abandoning of the market hypothesis in the universities and economic schools. They adapted a better but still imperfect theory called the best-tested hypothesis in all the social sciences. The role of money in microeconomic models and hypothesis is also another important factor in understanding the economic trends. In most monetary policies and economic models money is weakly defined. Most theories and programs employ the use of a cashless limit economy that avoids the use of cash. Since models and monetary policies deal with the reality, there is the need for them to ensure that they incorporate money at the center of discussions and framework. Price stickiness is also considered as a defect in the economic theories and models. Most types use price and wage stickiness through overlapping contracts. The common Calvo-type stickiness is called the ‘deus ex machina’ that has albeit contradiction but not a mathematical one. The Mainstream macroeconomic theory was not necessarily prepared for the economic crisis and recession. The founders of it did not know if the crisis was bound to happen. Although it is true, some of the key challenges resulting from the use of the DSGE models include the following: the heterogeneity issue, unknowability of the future events

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