Deciding between alternative approaches in macroeconomics

24 Oct 2017

Macroeconomics faces many problems since the failure to predict the Great Recession. These include theories that are now seen to be poor guides to how economies function and data that are not fully accurate, leading to economic policies that do not have their expected effects, and forecasts that go awry.

To improve empirical macroeconomic models, I propose replacing the current dominant paradigm of using just one of the four main methods of deciding between alternative models (namely theory analyses, empirical evidence, policy relevance, or forecast accuracy), by a new combined approach. This new method retains a theory model within a much larger formulation, which allows that theory to be evaluated simultaneously against a wide range of alternative specifications. When the theory is a good representation, it will be kept,but a better model will be discovered when the initial theory is inadequate.

To read Prof Sir David Hendry's full argument please click here to be directed to his new paper.