A Call for Building Credible Brackish-Water Open Macroeconomic Models

The recent experience of macroeconomists in their inability to foresee and avert the prolonged global recession called into question the credibility of their economic theories and models. This paper is an attempt at introspection. The paper reviews the developments in macroeconomic theory and models and offers suggestions on what could have gone wrong with the prevailing macroeconomic theories and models. It suggests that there are dangers in following the mainstream models if such models are not based on empirical credibility in respect of fitting the real-life data they are supposed to explain. It suggests the limitations of statistical methods used in macroeconomic modeling and in the criteria used to establish their credibility and offers some suggestions to overcome those limitations. It brings to the fore the fact that what are now termed institutions “too big to fail” have not been modeled adequately by economists. The paper also suggests the importance of treating economies as open economy models with external sector and as truly dynamic with investment and growth