Simon Wren-Lewis summarizes: “… John Williams … calls here for the next generation of DSGE models to focus on three areas. First they need to have a greater focus on modelling the labour market and the degree of slack, which I think amounts to the same thing as how the NAIRU changes over time. Second, he talks about a greater focus on medium- or long- run developments to both the ‘supply’ and ‘demand’ sides of the economy. The third of course involves incorporating the financial sector. Perhaps one day DSGE models will do all this, although I suspect the macroeconomy is so complex that there will always be important gaps in what can be microfounded. But if it does happen, it will not come anytime soon.”
It will NEVER come, for the simple reason that the microfoundations approach is methodologically dead. The problem is that the present generation of economists is in the state of manifest self-delusion. The point to grasp is that economics has to be macrofounded.*
For more details see
- NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy
- Infantile model bricolage, or, How many economists can dance on a non-existing pinpoint?
- DSGE and profit―forget it! MMT and profit―forget it!