Heterodox A macroeconomic model is an analytical tool designed to describe the operation of the problems of economy of a country or a region.
Simple textbook descriptions of the macroeconomy involving a small number of equations or diagrams are often called ‘models’.
They are simple enough to be used as illustrations of theoretical points in introductory explanations of macroeconomic ideas; but therefore quantitative application to forecasting, testing, or policy evaluation is usually impossible without substantially augmenting the structure of the model.
[3] The first global macroeconomic model, Wharton Econometric Forecasting Associates' LINK project, was initiated by Lawrence Klein.
[5][6][7] Econometric studies in the first part of the 20th century showed a negative correlation between inflation and unemployment called the Phillips curve.
They claimed that the historical relation between inflation and unemployment was due to the fact that past inflationary episodes had been largely unexpected.
[11] In 1976, Robert Lucas Jr., published an influential paper arguing that the failure of the Phillips curve in the 1970s was just one example of a general problem with empirical forecasting models.
These models begin by specifying the set of agents active in the economy, such as households, firms, and governments in one or more countries, as well as the preferences, technology, and budget constraint of each one.
[22][23] More elaborate DSGE models are used to predict the effects of changes in economic policy and evaluate their impact on social welfare.
[24][25] DSGE models instead emphasize the dynamics of the economy over time (often at a quarterly frequency), making them suited for studying business cycles and the cyclical effects of monetary and fiscal policy.
[26] Like the DSGE methodology, ACE seeks to break down aggregate macroeconomic relationships into microeconomic decisions of individual agents.