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Macroeconomic analysis

Notoriously inconclusive policy recommendations and the failure to foresee the Great Recession have caused many commentators to voice doubts about the usefulness of macroeconomics. This column argues that macroeconomics can offer a coherent framework to understand and evaluate policy options, but macroeconomists need to explain the field’s subject matter and findings better to both policymakers and the general public. A new textbook aims at closing the gulf between macroeconomic research and widespread misconceptions about it by providing a concise and rigorous introduction to modern macroeconomic theory.

Is macroeconomics useful? A number of commentators have voiced doubts, pointing to the profession’s perceived failure to foresee the Great Recession as well as notoriously inconclusive policy recommendations. Of what use, they ask, is research that cannot reliably predict exchanges rates, interest rates, or business cycle turning points? Many see a field in decline.

Those who actually engage with macroeconomic research tend to disagree. As they emphasise, macroeconomics offers a coherent framework to understand and evaluate policy options. This framework undergoes constant refinement and extension but, naturally, the profession cannot predict shocks outside the framework’s domain. However, it can explain, quite successfully, how shocks propagate. And compared with a few decades ago, methodological controversies have given way to a constructive dialogue between theory, which is firmly grounded in microeconomics, and empirics, which is informed by rich, disaggregate data sets. As Reis (2018) concludes, “[t]his is a sign of a field full of vitality, not of a field in trouble.”

Evidently, academic macroeconomists must regain the interpretative high ground from market commentators. They must better explain the field’s subject matter and findings.  And they must educate the general public and help shape conventional wisdom which tends to constrain policy choices. While it does help when policymakers understand fundamental macroeconomic concepts, it is equally important for the general public to grasp them. 

Students offer the best hope for closing the gulf between macroeconomic research and widespread misconceptions about it. Graduates who embark on careers in public service, industry, or journalism should see beyond the 1980s curriculum; their horizon should extend to the research frontier. And their natural inclination should be to mind accounting identities and think in terms of models – after all, “models make economics a science” (Rodrik 2015). 

A good model is an abstract parable that conveys general insights. It clarifies assumptions and implications and ensures consistency, which is particularly valuable in the policy debate. Since the world is complex and human capacity limited, a set of models that share underlying principles is preferable to a single macroeconomic framework. “Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant” (Keynes 1938), and eclecticism built on solid foundations is key.

A new textbook

The textbook Macroeconomic Analysis (Niepelt 2019), recently published by MIT Press, reflects this perspective. Targeting master students and beginning doctoral students with a background in undergraduate microeconomics, the aim of the textbook is to provide a concise but rigorous and thorough introduction to modern macroeconomic theory.

Chapters 1–7 cover microeconomic foundations, dynamic household choice, dynamic general equilibrium, risk and market incompleteness, asset prices and bubbles, labour supply, growth, technology- and sunspot-driven business cycles as well as open economy topics.

Chapters 8–10 analyse deviations from the frictionless benchmark. They introduce frictions in the investment sector as well as in labour and financial markets. Money is analysed as a unit of account, store of value, and medium of exchange. Further,  price setting and the macroeconomic consequences of price rigidity are explored.

Finally, Chapters 11–13 focus on government and economic policy. The positive analysis covers tax, debt, social security, and monetary policy, equivalence relations, fiscal-monetary policy interaction, and determinacy. The normative part centres on Ramsey fiscal and monetary policies. And the last chapter analyses sequential policy choice and political economics.

Appendices cover methods and contain technical discussions (see the Table of Contents). An Exercise manual and Solution manual accompany the textbook. The MIT Press flyer contains additional information and inspection copies may be obtained here.

Several renowned macroeconomists have endorsed Macroeconomic Analysis:

“An orderly and elegant presentation of essential ideas of modern macroeconomics with a perfect mix of tools and applications.”
—Thomas Sargent, Professor of Economics, New York University; recipient of the 2011 Nobel Prize in Economic Sciences

“This book provides an excellent introduction into dynamic macroeconomics. Its analysis is deep, self-contained, and still concise. The chapters on labor search frictions, financial frictions, and money are an extra plus and make it a superb choice for a first-year PhD or advanced Masters’ course in macroeconomics.”
—Markus Brunnermeier, Edwards S. Sanford Professor of Economics, Princeton University

“A needed, up-to-date primer on macroeconomic theory. It is comprehensive, covering all the essential topics, from optimal consumption and labor supply to economic growth, business cycles, and asset markets. It is thorough and rigorous, yet accessible, as it requires little prior knowledge of the key concepts and mathematical tools.”
—George-Marios Angeletos, Professor of Economics, MIT

“Macroeconomic Analysis is the rare textbook that is both comprehensive and rigorous, as well as concise and simple. By staying focused on the core model of dynamic macroeconomics, it elegantly navigates through many topics. After studying this book, students will be ready to join the exciting debates in modern macroeconomics.”
—Ricardo Reis, A. W. Phillips Professor of Economics, London School of Economics and Political Science

“Niepelt’s textbook provides a concise, but rigorous introduction to the key concepts, tools, and models that constitute modern macroeconomic theory. His pedagogical approach, introducing the key building blocks of the theory one at a time, and focusing on what is essential at each stage, should make the learning experience a pleasant one. I expect it to become a staple reference in first-year graduate courses.” 
—Jordi Galí, CREI, Universitat Pompeu Fabra and Barcelona GSE

“Finally, a book that fills the longstanding, and growing, gap between existing undergraduate and graduate macroeconomics textbooks. The winning approach of the author is to rigorously develop the core insights in each topic studied, avoiding superfluous diversions. The emphasis on government policy and political economy is especially useful in interpreting current global macroeconomic events.”
—Gianluca Violante, Professor of Economics, Princeton University

“This is an excellent textbook for macroeconomics at the master’s or beginning PhD level. The topics and the material used to cover them are well chosen; the treatment gives a solid and unified background for positive and normative analysis. It strikes a good balance between being conceptually clear and logically consistent, and at the same time quite accessible.”
—Fernando Alvarez, Saieh Family Professor of Economics, University of Chicago


Keynes, J M (1938), “A letter to Harrod”, 4 July.

Niepelt, D (2019), Macroeconomic Analysis, MIT Press.

Reis, R (2018), “Is something really wrong with macroeconomics?”, Oxford Review of Economic Policy 34(1–2): 132–155.

Rodrik, D (2015), Economics Rules, Norton.

Rubinstein, A (2017), “Comments on Economic Models, Economics, and Economists: Remarks on Economics Rules by Dani Rodrik”, Journal of Economic Literature 55(1): 162–172.


1 VoxEU has been a formidable success in this regard.

2 See also the discussion in Rubinstein (2017).

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