"Microfoundations": I Do Not Think That Word Means What You Think It Means: Wednesday Focus
Morning Must-Read: Ken Rogoff on the Need for More Expansionary Fiscal Policy--of a Form That Pays for Itself via Higher Tax Revenue in the Long Run

Morning Must-Read: Mark Thoma: Models Are Tools: Use the Right Tool for the Curren Job

Mark Thoma: Is There One Economic Model to Rule Them All?:

Models are built to answer specific questions. We don’t have one grand model that can explain everything.... The best map to use to drive from Seattle to Los Angeles is a lot different from the best map to find out if it is safe to dig a deep hole in someone’s yard.... And if we try to stuff even more information onto the map so that it can answer all of our questions, telephone poles, roads, elevation, every side road, every house and every store, all the bus routes, rainfall, the types of vegetation, etc. etc. the map becomes too complicated to be useful. Economic models are no different. The trick in modeling is to pare away all the inessential features so that there can be a sharp focus on the question of interest. The best maps are very specialized and highlight only what we need to know. The best economic models do the same....

Where I disagree with many of my colleagues is in the assertion that we should limit ourselves to a single class of models, e.g. variations on the New Keynesian model... built to explain a world of moderate fluctuations in GDP... featur[ing] temporary price rigidities... [with] aggregates... consistent with the optimizing behavior of individual consumers and producers. For certain types of questions – how should policymakers behave to stabilize an economy with mild fluctuations induced by price rigidities--it is the best model to use.... When a different world emerged, a large financial shock and the ensuing Great Recession, the model was of little use.... The IS-LM model, on the other hand, was built in the aftermath of the Great Depression to examine precisely the kinds of questions we faced throughout the Great Recession, issues such as a liquidity trap, the paradox of thrift, and how policymakers should react in such an environment. Why is it surprising that a model built to explain a particular set of questions does better than a model built to explain other things?