There is a new edition of Michael Wickens’ graduate macro text, [amazon_link id=”0691152861″ target=”_blank” ]Macroeconomic Theory: A Dynamic General Equilibrium Approach[/amazon_link]. Given that the previous edition was published in 2008 and therefore written before the financial crisis, I was keen to see the update. There are two substantial new chapters, one on ‘Banks, financial intermediation and unconventional monetary policy’, and one on ‘Unemployment’, which covers search theory, efficiency wage theory and wage stickiness.

Mike Wickens is a staunch advocate of DGSE modelling, arguing that the critics who blame it somehow for the crisis are missing the point. As he puts it in the preface to this new edition, it would be a retrograde step to give up on the ambition of integrating micro and macroeconomics, and the possibility of considering the complete picture of the economy. He argues against the ad hoc tradition of time series econometrics, saying that it leads to an over-emphasis on ‘goodness of fit’ and under-emphasis on macro theory.

Who can argue with the principle that everything is connected? But I disagree with Mike. I used to be one of those time series econometricians, and when working on my PhD thesis in the early 1980s decided to introduce the economic theories of the kind set out in the Unemployment chapter here (search theory, efficiency wage models and wage/price stickiness) to meet industry-level data. It turned out that

a) the equilibrium models are simply not consistent with the data – one has to ditch either the theory or the evidence, and I’m on the side of the evidence. Therefore until we do have a better theory (and anyway, what could be more ad hoc than wage stickiness as a model?), I prefer the traditional time series approach of careful but non-theoretical investigation of the data, which Mike Wickens rejects.

b) individual sectors of the economy are so different from each other in their time series properties that it is clear any general macro theory needs to address aggregation and industry-specific factors, which are probably institutional. That seemed much too hard, and I set off on a voyage towards microeconomics instead.

People who teach macroeconomics in universities need a textbook to teach from, and I’m sure that this is one of the best around. (It’s graduate level, being moderately technical although not too hard for a student who has got her mind around the basic differential calculus, and the text explains the equations pretty clearly.) But I find it depressing that more than 20 years after my generation of graduate students found in our research that what then became the DGSE approach had no evidential foundation, and in the wake of such a dramatic macroeconomic dysfunction, this is still the approach the textbooks take. (One more reason to regret that the academic journals won’t publish negative results – there were lots of 1980s theses reporting that the equilibrium modeling approach didn’t work.)

Publishers, lots of macroeconomists would now like to teach a different kind of macro course – humbler, more eclectic, more institutional, and including some entirely novel modelling approaches. Please can they have a textbook?

[amazon_image id=”0691152861″ link=”true” target=”_blank” size=”medium” ]Macroeconomic Theory: A Dynamic General Equilibrium Approach (Second Edition)[/amazon_image]