Koen Vermeylen (University of Amsterdam – Amsterdam School of Economics) has recently published online a working paper entitled “The Methodology of Modern Macroeconomics and the Descriptive Approach to Discounting“.
Abstract: Critics of modern macroeconomics often raise concerns about unwarranted welfare conclusions and data mining. This paper illustrates these concerns with a thought experiment, based on the debate in environmental economics about the appropriate discount rate in climate change analyses: I set up an economy where a social evaluator wants to determine the optimal time path of emission levels, and seeks advice for this from an old-style neo-classical macroeconomist and a new neo-classical (modern) macroeconomist; I then describe how both economists analyze the economy, their policy advice, and their mistakes. I then use the insights from this thought experiment to point out some pitfalls of the modern macroeconomic methodology.
Keywords: modern macroeconomics, methodology, descriptive, prescriptive, discount rate.
JEL Classification: B22, B41, E13, O44, Q52, Q54.