Journal of Economic Literature, Vol. XXVZZZ (December
to interpret discussions of economic pol-icy in the press and among policy makers.Economists in business and governmentcontinue to use the large-scalemacro-econometric models for forecasting andpolicy analysis. The theoretical develop-ments of the past twenty years havehad relatively little impact on appliedmacroeconomics.Why is there such a great disparity be-tween academic and applied macroeco-nomics? The view of some academics isthat practitioners have simply fallen be-hind the state of the art, that they con-tinue to use obsolete models becausethey have not kept up with the quicklyadvancing field. Yet this self-serving viewis suspect, for it violates a fundamentalproperty of economic equilibrium: It as-sumes that a profit opportunity remainsunexploited. If recent developments inmacroeconomics were useful for appliedwork, they should have been adopted.The observation that recent develop-ments have had little impact on appliedmacroeconomics creates at least the pre-sumption that these developments are oflittle use to applied macroeconomists.One might be tempted to concludethat, because the macroeconomic re-search of the past
years has had littleimpact on applied economists, the re-search has no value. Yet-this conclusionalso is unwarranted. The past
yearshave been a fertile time for macroeco-nomics. Recent developments have justnot been of the sort that can be quicklyadopted by applied economists.A.
Parable for Macroeconomics
A tale from the history of science ishelpful for understanding the currentstate of macroeconomics. Because
amnot an historian of science, I cannotvouch for its accuracy. But regardless ofwhether it is true in detail, the storyserves nicely as a parable for macroeco-nomics today.Approximately five centuries ago,Nicholas Copernicus suggested that thesun, rather than the earth, is the centerof the planetary system. At the time, hemistakenly thought that the planets fol-lowed circular orbits; we now know thatthese orbits are actually elliptical. Com-pared to the then prevailing geocentricsystem of Ptolemy, the original Coperni-can system was more elegant and, ulti-mately, it proved more useful. But at thetime it was proposed and for many yearsthereafter, the Copernican system didnot work as well as the Ptolemaic system.For predicting the positions of the plan-ets, the Ptolemaic system was superior.Now imagine yburself, alternatively, asan academic astronomer and as an ap-plied astronomer when Copernicus firstpublished. If you had been an academicastronomer, you would have devotedyour research to improving the Coperni-can system. The Copernican system heldout the greater promise for understand-ing the movements of the planets in asimple and intellectually satisfying way.Yet if you had been an applied astrono-mer, you would have continued to usethe Ptolemaic system. It would havebeen foolhardy to navigate your ship bythe more promising yet less accurate Co-pernican system. Given the state ofknowledge immediately after Coperni-cus, a functional separation between aca-demic and applied astronomers was rea-sonable and, indeed, optimal.In this paper
survey some of the re-cent developments in macroeconomics.My intended audience includes those ap-plied economists in business and govern-ment who often view recent researchwith a combination of amusement, puzz-lement, and disdain. My goal is not toproselytize. Rather, it is to show how sev-eral recent developments point the waytoward a better understanding of theeconomy, just as Copernicus' suggestionof the heliocentric system pointed the