Trends and fads in macroeconomic dynamics

Abstract

This paper tries to distinguish between those features of macroeconomic dynamics which will stand the test of time and which will not. It reviews the rational expectations and the representative agent models. It concludes that more attention should be paid to nonlinear dynamics and uncertainty than has hitherto been paid by macroeconomists. This lecture presents some thoughts and observations resulting from having worked for over a quarter of a century in the general area of macroeconomic dynamics. The stimulus for thinking about these issues was occasioned by the writing of my book Methods of Macroeconomic Dynamics, recently published by MIT Press. This book attempts to provide an overview of the methods employed in the analysis of macrodynamic systems. In doing this one has to sort out what is important, that is what has a permanent effect on how we conduct macrodynamics, and what is purely transitory. This lecture provides a fortuitous occasion to present these views. My remarks will be structured as follows. After reviewing the early background to modern macrodynamics, I will then turn to some of the more recent developments, including the rational expectations and representative agent models. I will then comment on some of the current practices of the profession, including what I consider to be some fads, and conclude with some observations about the future.