Monday, March 5, 2012
Can You Say Sonnenschein?......I knew you could
What bothers me about the current discussion on the relative merits of micro-founded versus non-micro-founded macro is the crazy idea that RBC/DSGE models are micro-founded. These are representative agent models, people! They are micro-founded models of a macroeconomy consisting of one agent, and so we should by all means use them whenever we come across such an economy, and good luck with that. Unfortunately, the macroeconomy we'd like to understand has many agents. And any attempt to apply general equilibrium analysis to such an economy is faced with an insurmountable problem. Hugo Sonnenshein showed conclusively that aggregate excess demand functions, aggregated from "well-behaved" individual excess demand functions, can behave any way you like - arbitrarily. Just sayin'.