What Do Policymakers Really Want from Macroeconomics?

by Ivan Boldyrev

Policy makers’ response to COVID-19 shows how much they can depend on a scientific advice. Health experts are right at the center of the policy response. Economists in policy making departments and central banks are grappling to understand the consequences of the fall-out and how to best balance health outcomes and economic costs. Economists in academia have gone into over-drive mode in producing vast numbers of papers claiming to be motivated by providing policy guidance.

Where does this economic knowledge come from and how do we know if it is really hitting the mark. Is it, in fact, mostly just a self-serving business? The goal of this project is to look at the interaction between the needs of policy makers and what macroeconomists actually provide to try and understand the extent to which economists actually contribute to the policy debate. Rather than being told about the possible impact from the authors, why not find out from those who are the supposed to be customers?

There are various communities of expertise informed by macroeconomics. These include academics, applied economists in government bodies, central banks and international organizations as well as policy-makers informed by advisory economists and those in think-tanks or research organizations.

Yet communication between those groups is not always straightforward – each living within their own culture of expertise. The questions which policy-makers face are invariably normative and where all else is not in fact equal. Indeed, four years ago a UK Government minister suggested that the public has had enough of experts. Even in today’s exceptional times, policy makers and scientists appear weary of the motives of the other.

But why might they have different aims? Macroeconomists aim to understand the deeper mechanisms but there limitations imposed by disciplinary norms and standards. Some limitations are of course justified to clearly define and broadly accepted body of research and insights. Policy makers seem to be more preoccupied with short-term issues which are vastly more complicated and usually shrouded in fundamental uncertainty.

A case in point is that despite huge advances in macroeconomic modelling, many central bank policy makers think in terms of an output gap model of inflation (despite its record) and perhaps IS-LM to explain fluctuation in demand. Neither are obviously anywhere near the frontier of macroeconomic research. Another interesting example was Brexit, where the scope for economists to consider alternative institutional arrangements was perhaps limited by professional norms.

Understanding the difference that fundamental uncertainty makes to the problems facing policy makers and academics is also important. When uncertainty is not an external shock but arises from complex interactions the ‘off-equilibrium’ outcomes become as important as the equilibrium outcomes for the policy maker to consider. Almost all of economics is conducted in terms of equilibrium paths.

The backgrounds, value orientations and beliefs of macroeconomists and policy makers may also diverge. They seem to have very different time horizons as well as different implicit working models of the economy. It is perhaps not a surprise that the complaints of public intellectuals about the sheer inadequacy of macroeconomics are paired by corresponding complaints of macroeconomists deploring simplicity of policy-makers’ approach.

Some of these issues are already being addressed in other Rebuilding Macroeconomics projects. For example, Beatrice Cherrier is looking at on how ideas transfer between academia and central banking and Matthias Thiemann on the channels of exchange between academic and applied economists.

In my project, I intend to do something rather obvious, but perhaps also very overdue. I will carry out semi-structured interviews with central bankers, Treasury officials, parliamentarians and NHS officials to simply ask what kind of macroeconomic questions they want answered, what conceptual resources they are using and what are their current needs. This would involve, in particular, finding out what kind of theories or models they trust and why they are being used by policy makers. I intend to ask the customers.

The ultimate goal of the project is to explore how current macroeconomic challenges are reflected in the opinions, discourses, and concerns of policy makers and which new problems appear to them as pressing and unresolved. Which problems do they feel are well served by macroeconomics and which ones perhaps less so? This may help improve the communication between economists and policy makers as well as indicate a long-term agenda for rebuilding macroeconomics.