The distinction between macro and micro is meant to be more akin to the type of question asked, rather than the general tools used – macro questions deal with a broader issues. 

“On the substance of what you’re saying, you’re referring to a subset of the DSGE modelling done. Your critique is very fair for the problem you’re talking about but the DSGE framework has since been exported to other areas of macro, as I understand it.”

DSGE modeling only took off post-2005, and almost every paper I’ve read that uses DSGE models to discuss a non-monetary related policy issue does so by augmenting the model with something else – given that any discussion of fiscal policy within a typical DSGE model is empirically empty.

I’ve also noticed that these papers tend to come up with much more interventionist policy prescriptions than the standard literature in their fields – so if anything, I’d be more convinced that there is a left leaning bias in their implementation rather than a right leaning bias …

I accept your point about making sure we include all “core” assumptions in any model when answering a question – or else we could be implicitly assuming something inappropriate.  This is stock standard good economic methodology – and the answer and the elements we assume (do we rely on one model that includes all core assumptions, or a set of models that test different tendencies given subsets of core assumptions?) should be something that is closely kept in mind.  The realism of core assumptions is straight out of Maki.

However, I disagree completely that the make up of a standard DSGE model is proof of a right-wing/conservative bias – which is the entire thrust of what comes from the title of the post and the quote that has been pulled out.

“That’s all a sideshow to the central question of how assumptions made for tractability then influence our conclusions and policy recommendations. For example, you point to perfect competition as an analogy and I would argue that the assumption generates a significant bias in applied economists’ work that is often overlooked.”

The general point you raise here is a very important one – although I would say that this comes more from your thoughtfulness then from the quote mentioned above.

This brings us back to the very issue of identifying core and peripheral assumptions when looking at an issue of interest – you are stating that, sometimes when we look at an issue, we make implicit claims about core assumptions which are false … and we hide these by saying that they are “exogenous.  This is dangerous, and wrong, and avoiding doing this is a central lesson that we gain from the study of economic methodology.

In the case of DSGE modeling, and its central goal to model the impact of monetary shocks, the treatment of government policy as exogenous appears to me to be a fair one. 

Beyond this, the statement that using a DSGE model in this way has a “right wing” or “conservative” bias appears very odd – as DSGE models don’t give us policy relevant information about fiscal policy. 

Now don’t get me wrong – the issue you raise in this last paragraph is very important.  Often economists will claim a result, when it is really due to some CP assumption being inappropriate.  And these sorts of issues should be tackled anywhere they are!  In this specific case though, I think the criticism is unjustified – and has involved the role of DSGE modeling in economics being misattributed.

1. On the substance of what he says, I agree that it’s very arguable that he misrepresents macreconomics as a discipline. I don’t think that’s the interesting part of his comment.
2. On the substance of what you’re saying, you’re referring to a subset of the DSGE modelling done. Your critique is very fair for the problem you’re talking about but the DSGE framework has since been exported to other areas of macro, as I understand it.
3. That’s all a sideshow to the central question of how assumptions made for tractability then influence our conclusions and policy recommendations. For example, you point to perfect competition as an analogy and I would argue that the assumption generates a significant bias in applied economists’ work that is often overlooked.

I can no doubt word this more concisely.

In the DSGE literature, which is a subset of macro literature, we are modeling the impact of monetary policy – given that government policy is exogenous.  This is to help inform monetary policy.

If we want to discuss issues of government policy, then we use different models – as we often do when looking at tax and other structural issues.  We can even model fiscal policy as stabilisation policy, given the central bank reaction functions we are able to model, with help from the DSGE literature – and sure enough there has been a lot of this as well.

However, just because the subset of a discipline focuses on answering a specific question doesn’t mean that the entire discipline has a “conservative bias”.  To say this we instead need to say that there is “too much” focus on DSGE models, and “too little” focus on issues of fiscal policy – that is certainly not what the quote is suggesting, and is in itself a relatively big claim (although one I think would be interesting to look into).

Ok, answer me this.  How is saying that stabilisation policy is the role of monetary authorities conservative/right wing?

Does this literature suggest that there is a limited role of government for stabilisation policy – yes, yes it does.  

But this quote:

“You guessed it: a macro literature where most papers have only a very limited role for government.”

Is completely false, because there is a significant amount of macro literature that discusses the role of government in a structural sense.  The DSGE framework is, in of itself, of very little use here – any DSGE models used to discuss the role of fiscal policy tend to be augmented with something else, in order to discuss a specific “tendency” – and often in a way that is noted as explicitly inferior to other forms of analysis.

DSGE modeling, even the New Keynesian “synthesis”, is actually only a minority part of the macro literature (we are just hearing the most about it, because we are in the midst of a large recession) – I find the idea that because this literature focuses on the business cycle (which is its entire point) sensible, not some random conservative bias.

I have noticed that industrial economics says very little about stabilisation policy – does this imply that there is an “anti-inflation targeting bias” in industrial economics?  You may think I’m joking, but this is truly an equivalent statement.

As you well know, there are plenty of papers using a DSGE framework to examine both fiscal policy and the government’s potential role in monetary policy.

Nonetheless, you are avoiding the question raised by the quote, which is whether the assumptions we make for convenience have a significant influence on our eventual conclusions.

Within macroeconomics, DSGE models are generally only used to analyse monetary policy – unless they have been specifically “fit for purpose” to analyse something else.  In the most part, when people want to analyse the role of government they use different models – and anyone trying to use the government spending term in a DSGE model to do that would be looked at like they didn’t know what they were doing.

Macro literature that involves DSGE’s has nothing to do with government policy, making this critique entirely aimless.

There is another whole set of macro literature discussing government policy, if we are going to say that macroeconomists looking at fiscal policy have a “right wing bent” we should be looking at that literature – rather than aimlessly criticising an unrelated set of models.