PROBLEMS WITH MODERN ECONOMICS

Abstract

AbstractModern macroeconomics has become vague, subjective, uncertain, and unhelpful in policy formation, revealing too much faith in automatic corrections of markets. Criticisms can be made, in particular, about the use of rational expectations, principal agent analysis, and monetarism. Modern econometrics can be criticized for diversion of attention away from the central role of statistical specification of the probability distribution of error together with economic specification of structural relationships towards preoccupation with the statistical properties of individual or small subgroups of economic variables, which are the very objects of the whole econometric investigation. The unquestioning reliance on cointegration and lead–lag studies of causations in simple, bivariate relationships have taken attention away from the role of economics in specifying multivariate nonlinear systems. Some comments are made on the use of high-frequency data for improving econometric forecasting. (JEL EO)

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