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Macroeconomics has been under scrutiny as a field since the financial crisis, which brought an abrupt end to the optimism of the Great Moderation. There is widespread acknowledgement that the prevailing dynamic stochastic general equilibrium (DSGE) models performed poorly, but little agreement on what alternative future paradigm should be pursued. This article is the elaboration of four blog posts that together present a clear message: current DSGE models are flawed, but they contain the right foundations and must be improved rather than discarded. Further, we need different types of macroeconomic models for different purposes. Specifically, there should be five kinds of general equilibrium models: a common core, plus foundational theory, policy, toy, and forecasting models. The different classes of models have a lot to learn from each other, but the goal of full integration has proven counterproductive. No model can be all things to all people.

We develop a new index of economic policy uncertainty (EPU) based on newspaper coverage frequency. Several types of evidence—including human readings of 12,000 newspaper articles—indicate that our index proxies for movements in policy-related economic uncertainty. Our U.S. index spikes near tight presidential elections, Gulf Wars I and II, the 9/11 attacks, the failure of Lehman Brothers, the 2011 debt ceiling dispute, and other major battles over fiscal policy. Using firm-level data, we find that policy uncertainty is associated with greater stock price volatility and reduced investment and employment in policy-sensitive sectors like defense, health care, finance, and infrastructure construction. At the macro level, innovations in policy uncertainty foreshadow declines in investment, output, and employment in the United States and, in a panel vector autoregressive setting, for 12 major economies. Extending our U.S. index back to 1900, EPU rose dramatically in the 1930s (from late 1931) and has drifted upward since the 1960s.

The adoption as policy models by central banks of representative agent New Keynesian dynamic stochastic general equilibrium models has been widely criticised, including for their simplistic micro-foundations. At the Bank of England, the previous generation of policy models is seen in its 1999 medium-term macro model (MTMM). Instead of improving that model to correct its considerable flaws, many shared by other non-DSGE policy models such as the Federal Reserve’s FRB/US, it was replaced in 2004 by the DSGE-based BEQM. Though this clearly failed during and after the global financial crisis, it was replaced in 2011 by the DSGE COMPASS, complemented by a ‘suite of models’. We provide a general critique of DSGE models for explaining, forecasting and policy analyses at central banks, and suggest new directions for improving current empirical macroeconomic models based on empirical modelling broadly consistent with better theory, rather than seeking to impose simplistic and unrealistic theory.

This article is a first attempt to systematically examine policy design and its influence on policy effectiveness in a comparative perspective. We begin by providing a novel concept and measure of policy design. Our Average Instrument Diversity (AID) index captures whether governments tend to reuse the same policy instruments and instrument combinations or produce policy solutions that are carefully tailored to the policy problem at hand. Second, we demonstrate that our AID index is a valid and reliable measure of policy design quality with a strong explanatory power for the outcome variables tested. Analyzing the composition of environmental policy portfolios in 21 OECD countries, we show that higher levels of AID are positively associated with a country’s policy effectiveness in environmental matters. Based on this finding, we analyze, in a third step, the factors that lead countries to adopt more or less diverse policy portfolios. We find that the policy design quality is significantly improved when policy makers are not bound by high institutional constraints and, more importantly, are backed by well-equipped bureaucracies.

Policymaking during a pandemic can be extremely challenging. As COVID-19 is a new disease and its global impacts are unprecedented, decisions are taken in a highly uncertain, complex, and rapidly changing environment. In such a context, in which human lives and the economy are at stake, we argue that using ideas and constructs from modern decision theory, even informally, will make policymaking a more responsible and transparent process.

This article investigates the strength of empirical evidence for various growth theories when there is model uncertainty with respect to the correct growth model. Using model averaging methods, we find little evidence that so-called fundamental growth theories play an important role in explaining aggregate growth. In contrast, we find strong evidence for macroeconomic policy effects and a role for unexplained regional heterogeneity, as well as some evidence of parameter heterogeneity in the aggregate production function. We conclude that the ability of cross-country growth regressions to adjudicate the relative importance of alternative growth theories is limited.

Governments intervene in firms' lives in a variety of ways. To enhance the efficiency of government intervention, many researchers and policy makers call for governments to make use of information contained in stock market prices. However, price informativeness is endogenous to government policy. We analyze government policy in light of this endogeneity. In some cases, it is optimal for a government to commit to limit its reliance on market prices to avoid harming the aggregation of information into market prices. For similar reasons, it is optimal for a government to limit transparency in some dimensions.

Using new scaling methods and a comprehensive public opinion dataset, we develop the first survey-based time-series–cross-sectional measures of policy ideology in European mass publics. Our dataset covers 27 countries and 36 years and contains nearly 2.7 million survey responses to 109 unique issue questions. Estimating an ordinal group-level IRT model in each of four issue domains, we obtain biennial estimates of the absolute economic conservatism, relative economic conservatism, social conservatism, and immigration conservatism of men and women in three age categories in each country. Aggregating the group-level estimates yields estimates of the average conservatism in national publics in each biennium between 1981–82 and 2015–16. The four measures exhibit contrasting cross-sectional cleavages and distinct temporal dynamics, illustrating the multidimensionality of mass ideology in Europe. Subjecting our measures to a series of validation tests, we show that the constructs they measure are distinct and substantively important and that they perform as well as or better than one-dimensional proxies for mass conservatism (left–right self-placement and median voter scores). We foresee many uses for these scores by scholars of public opinion, electoral behavior, representation, and policy feedback.

Economic Policy Uncertainty (EPU) research has grown in importance in today's highly volatile and interconnected economy. This work investigates the relationship between EPU and Financial Stability (FS) (i.e., Z-scores and non-performing loans (NPL)) with the mediating variable of governance quality through a 23-country panel data from 2005 to 2019. The System Generalized Method of Moment (SYS-GMM) is adopted to address the issue of endogeneity, which is common in panel data regression. The two-stage Sequential of the Linear Panel Data Model (SELPDM) was also used to test the robustness of the results. According to the findings, EPU has a significant negative effect on financial stability (measured by the Z-score) and a significant positive effect on financial stability in the banking industry of most developed economies (proxied by NPL). We also discovered that good governance can be used to mitigate the negative effects of EPU on financial stability; however, this influence varies depending on region, bank, and market structure, and it was significantly greater during the global financial crisis. Finally, this study can help financial managers and policymakers develop appropriate policies to understand how banks respond to EPU.

The term “policy analysis” describes scientific evaluations of the impacts of past public policies and predictions of the outcomes of potential future policies. A prevalent practice has been to report policy analysis with incredible certitude. That is, exact predictions of policy outcomes are routine, while expressions of uncertainty are rare. However, predictions and estimates often are fragile, resting on unsupported assumptions and limited data. Therefore, the expressed certitude is not credible. This paper summarizes my work documenting incredible certitude and calling for transparent communication of uncertainty. I present a typology of practices that contribute to incredible certitude, give illustrative examples, and offer suggestions on how to communicate uncertainty.