Is the Financial System Fit for Purpose?
What do policymakers want from Macroeconomics?
A preliminary exploration
Principal Investigator: Ivan Boldyrev
Ivan Boldyrev is an Assistant Professor of Economic Theory and Policy at Radboud University Nijmegen, Netherlands. He previously was a research fellow at University of Bochum and a postdoc research fellow at Witten/Herdecke University. His key areas of investigation are history, sociology, and philosophy of economics
Based on the interviews with applied macroeconomists and practitioners in economic policy, this project deals with the attitudes of policymakers towards macroeconomic theory and expertise.
The conversations demonstrated that time constraints, as well as differences in using and, arguably, experiencing time seem to play the major role in the interaction of the two cultures – those of academic macro and policy. That is why the major source of economic ideas used for policy is not academic articles, but rather most recent working papers and the immediate results of in-house research. In some organizations, this internal research plays the major role, which shifts the research priorities in the direction of more short-term relevance. Furthermore, both formal (impact assessments) and informal (personal contacts) channels are at work in the economic knowledge transmission.
The organizational measures to better integrate economics into policymaking process should be accompanied by fostering a critical and interdisciplinary perspective on the foundations and limitations of current macroeconomic models.
This can only be done if academic economists get additional incentives to take at least temporary policy jobs and if government economists get a more advanced economics education.
What policymakers mostly expect to get from macroeconomics is short-term sensemaking: the informed understanding of what is currently happening, the crucial factors and driving forces behind the current events in the economy. Policymakers use macroeconomics as a framework, which should be approached skeptically and which, however, is of increasing importance. The major factor for improving theory, policy, and theory-policy interaction is believed to be the increase of quality and quantity of empirical data. As of now, the respondents are in agreement that there is a huge room for improvement: the existing data is not readily available; it is sometimes biased; data collected by public entities is often not sufficient.
Given the better data, macroeconomic models relevant for policy should be mainly improved in the direction of incorporating more heterogeneity – in consumers, firms, and regions, in expectation formation and in possible reactions to policies. Classical macroeconomic topics – such as inflation, especially in its relation to the exchange rate, still remain on the agenda as well. New approaches to economics are also helpful in specific domains of policy (such as agent-based modeling in the analysis of financial stability).
Applied specifically to the UK, the improved models should address the most significant and interrelated long-term policy challenges: stalling productivity and the prospects of restructuring and growth, especially given the ageing population and the challenges of digitisation; Brexit and possible Scottish independence; climate change; individual and regional inequality. As evidenced by this list, in the policy context, microeconomic problems merge with macroeconomic ones – and have a distinct political economy aspect, something we also have to bear in mind while appraising different economic theories and evaluating their policy relevance.
What Do Policymakers Want from Macroeconomics? A Preliminary Exploration
Ivan Boldyrev | May 19, 2020