Macroeconomic Theory and Operational Reality

Origin of Specious

If I taught macroeconomics, I’d get students to read a lot of operational documents before doing anything else. Let’s be clear on the institutional, operational facts before we start modelling anything.

In the UK, I’d have the class read things like the Bank of England Redbook, HM Treasury’s Debt and Reserves Management Report, the Whole of Governments Accounts, and some of those helpful BoE Quarterly Reports explaining Quantitative Easing and money creation.

It wouldn’t be scintillating reading (then neither is textbook macro), but it would get us off a lot of red herring trails before we started looking at models. Models that ignore important institutional facts could just be discarded.

Here’s an example of the sort of thing you could throw away (from Mankiw’s textbook):

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