American Economic Journal: Macroeconomics 2009, 1:1, 267–279

http://www.aeaweb.org/articles.php?doi=10.1257/mac.1.1.267

Convergence in Macroeconomics:
Elements of the New Synthesis†
By Michael Woodford*

While macroeconomics is often thought of as a deeply divided field,

with less of a shared core and correspondingly less cumulative prog-
ress than other areas of economics, in fact, there are fewer funda-
mental disagreements among macroeconomists now than in past
decades. This is due to important progress in resolving seemingly
intractable debates. In this paper, I review some of those debates
and outline important elements of the new synthesis in macroeco-
nomic theory. I discusses the extent to which the new developments
in theory and research methods are already affecting macroeco-
nomic analysis in policy institutions. (JEL A11, E00)

H as there been a convergence of views in macroeconomics? Of course, but

there remains a wide spectrum of opinions on many issues and, perhaps even
more striking, the dispersion of opinions regarding which topics are currently most
interesting as subjects for further research is probably as wide as it has ever been.
Nonetheless, I believe that there is less disagreement among macroeconomists about
fundamental issues than there was in the past.
For example, in the 1960s, 1970s, and 1980s, macroeconomists were divided by
controversies that related not only to judgments about the likely quantitative impor-
tance of particular economic mechanisms, or to the kind of policies that different
scholars might advocate, but to basic questions of method (what kinds of models
could reasonably be employed in macroeconomic analysis?; what kinds of empirical
work could prove anything about the world?; and what kinds of questions could one
hope to answer).
In the 1960s and early 1970s, the main division was between the neo-Keynesians
and those in the monetarist school. This was not merely a dispute about whether the
“IS curve” or “LM curve” was more interest elastic, or whether monetary policy or
fiscal policy was more potent for purposes of aggregate demand management, as it
was sometimes portrayed in undergraduate textbooks. Instead, the two schools had
different conceptions of economics, and as a consequence, frequently argued against
one another. The Keynesians sought to estimate structural econometric models that

* Department of Economics, Columbia University, 420 W. 118th Street, New York, NY 10027 (e-mail: michael.
woodford@columbia.edu). Prepared for the session “Convergence in Macroeconomics?” at the annual meeting
of the American Economics Association, New Orleans, January 4, 2008. I would like to thank Eduardo Engel,
Marvin Goodfriend, and Julio Rotemberg for comments on an earlier draft.
†
To comment on this article in the online discussion forum visit the articles page at:
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267
268 American Economic Journal: MAcroeconomics JANUARY 2009

could be used to predict the short-run effects of alternative government policies.

In this enterprise, they did not require the relations that constituted their models to
be interpretable, other than relatively loosely, in terms of any economic theory, but
rather argued for the empirical relevance of the models on the basis of their fit with
aggregate time series. The monetarists were skeptical of this entire project. They
denied that one could expect to reliably model short-run adjustment processes and
instead emphasized the more robust predictions of economic theory about long-run
outcomes. They doubted the usefulness of structural econometric models and pre-
ferred to base their positive and normative analyses on plots showing the co-move-
ments of aggregate time series and on narrative accounts of economic developments.
They scoffed at the aspiration to “fine tune” the business cycle using quantitative
models.
In the late 1970s and the 1980s, the terms of debate shifted with the rise to promi-
nence of the “New Classical” school and real business cycle theory. In some ways,
the New Classicals might have seemed merely new recruits to the monetarist cause,
defending many of the same theses, albeit with more modern weapons.1 Yet, their
methodological position was quite different. Both the New Classical authors and the
real business cycle theorists took the central task of macroeconomics to be the con-
struction of structural models of short-run fluctuations, though they differed sharply
from Keynesian modelers in their conception of the requirements for a coherent
macroeconomic model, insisting on a rigorously formulated intertemporal general-
equilibrium structure. The central division among macroeconomists ceased to be
about whether one should try to precisely model short-run dynamics and came,
instead, to be about whether it was more important to insist upon theoretical coher-
ence in one’s models, even if this meant doing without econometric validation (the
position of the New Classical economists and real business cycle theorists), or to
insist upon econometric testing, even if this meant using specifications little con-
strained by theory (the position of the Keynesian macroeconometric modelers).
In the context of this history, I believe that there has been a considerable con-
vergence of opinion among macroeconomists over the past 10 or 15 years. While
the problems of the field have not all been resolved, there are no longer such fun-
damental disagreements among leading macroeconomists about what kind of ques-
tions one might reasonably seek to answer, or what kinds of theoretical analyses
or empirical studies should be admitted as contributions to knowledge. To some
extent, this is because positions that were vigorously defended in the past have had
to be conceded in the face of further argument and experience. But, to an important
extent, it is also because progress in macroeconomic analysis has made it possible to
see that the alternatives between which earlier generations felt it necessary to choose
were not so thoroughly incompatible when understood more deeply. The cessation of
methodological struggle within macroeconomics is due largely to the development
of a new synthesis by Marvin Goodfriend and Robert G. King (1997), called “the

1
Thus, James Tobin (1980) referred to the new school as “Monetarism Mark II.” Alternatively, from a
more recent perspective, N. Gregory Mankiw (2006) refers to monetarism as “the first wave of new classical
economics.”
Vol. 1 No. 1 woodford: elements of the new synthesis 269

New Neoclassical Synthesis,” that incorporates important elements of each of the

apparently irreconcilable traditions of macroeconomic thought.

I.  Elements of the New Synthesis

What do macroeconomists, at least those macroeconomists concerned with under-

standing the determinants of national income, inflation, and the effects of monetary
and fiscal policy, ngenerally agree on? Here, I briefly list some of the most impor-
tant examples of formerly contentious issues about which there is now fairly wide
agreement.

First, it is now widely agreed that macroeconomic analysis should employ models
with coherent intertemporal general-equilibrium foundations. These make it pos-
sible to analyze both short-run fluctuations and long-run growth within a single
consistent framework. Of course, different model elements will be more important
when addressing different questions, so that the complications from which one will
frequently abstract will be different in the case of short-run and long-run issues.
But it is now accepted that one should know how to render one’s growth model and
one’s business-cycle model consistent with one another, in principle, on those occa-
sions when it is necessary to make such connections. Similarly, microeconomic and
macroeconomic analysis are no longer considered to involve fundamentally differ-
ent principles, so that it should be possible to reconcile one’s views about household
or firm behavior, or one’s view of the functioning of individual markets, with one’s
model of the aggregate economy, when one needs to do so.
In this respect, the methodological stance of the New Classical school and the
real business cycle theorists has become the mainstream. But this does not mean
that the Keynesian goal of structural modeling of short-run aggregate dynamics has
been abandoned. Instead, it is now understood how one can construct and analyze
dynamic general equilibrium models that incorporate a variety of types of adjustment
frictions that allow these models to provide fairly realistic representations of both
short-run and long-run responses to economic disturbances. In important respects,
such models remain direct descendents of the Keynesian macroeconometric models
of the early postwar period, though an important part of their DNA comes from
neoclassical growth models as well. In light of this development, the conclusion by
Robert E. Lucas, Jr., and Thomas J. Sargent (1978, 69) that not only were Keynesian
macroeconometric models of the time lacking in “a sound theoretical or econometric
basis” but, “there is no hope that minor or even major modification of these models
will lead to significant improvement” must be regarded as having been premature.
I should also be clear that when I say it is now accepted that macroeconomic mod-
els should be general equilibrium models, I do not refer solely to the special case of
models of perfect competitive equilibrium with fully flexible wages and prices. The
dynamic stochastic general equilibrium (DSGE) models now used to analyze the
short-run effects of alternative policies often involve imperfect competition in both
labor markets and product markets, wages and prices that remain fixed for intervals
of time rather than being instantaneously adjusted to reflect current market condi-
tions, and an allowance for unutilized resources as a result of search and matching
270 American Economic Journal: MAcroeconomics JANUARY 2009

frictions. The insistence of monetarists, New Classicals, and early real business cycle
theorists on the empirical relevance of models of perfect competitive equilibrium, a
source of much controversy in past decades, is not what is now generally accepted.
Instead, what is important is having general- equilibrium models,n the broad sense
of requiring that all equations of the model be derived from mutually consistent
foundations, and that the specified behavior of each economic unit make sense given
the environment created by the behavior of the others. At one time, Walrasian com-
petitive equilibrium models were the only kind of models with these features that
were well understood, but this is no longer the case.

Second, it is also widely agreed that it is desirable to base quantitative policy anal-
ysis on econometrically validated structural models. A primary goal of theoretical
analysis in macroeconomics is to determine the data-generating process implied by
one structural model or another in order to allow consideration of the extent to which
the model’s predictions match the properties of aggregate time series. Methods for
the econometric estimation of structural models, and for stochastic simulation of
such models under hypothetical policies, are a crucial part of the modern macro-
economist’s tool kit. In this respect, the macroeconometric research program of the
postwar Keynesians remains alive and well, given considerable new life by technical
advances since the 1970s.
Modern macroeconometric modeling, exemplified by the work of Lawrence J.
Christiano, Martin Eichenbaum, and Charles L. Evans (2005); David Altig et al.
(2005); and Frank Smets and Raf Wouters (2003, 2007), represents a return to the
ambitions of the postwar Keynesian modelers in at least two respects. First, the
emphasis on the use of estimated structural models for policy analysis contrasts
with the preference of many monetarists for drawing inferences about counterfactual
policies from reduced-form empirical relations such as simple correlations between
money growth and other variables. Second, the quest to develop models that are
intended to provide a complete quantitative description of the joint stochastic pro-
cesses by which a set of aggregate variables evolve, the parameters of which can then
be estimated by direct comparison with the relevant time series, contrasts with the
emphasis of first-generation “equilibrium business cycle theory” on stylized models
that were intended to provide insight into basic mechanisms with no pretense of
quantitative realism. It is now generally agreed that useful contributions to macro-
economic theory should be what King (1995) calls “quantitative theory.”
Nonetheless, modern empirical macroeconomics differs from classic postwar
macroeconometric modeling in deeper respects than the mere introduction of new
approaches to estimation. In particular, a great deal more attention is given to the
grounds for treating an econometric model as “structural” for purposes of a policy
evaluation exercise. In the past, the specification of structural relations was often
based only loosely on economic theory. The specific form of the relations was sup-
posed to be dictated by the criterion of goodness of “fit,” but, in practice, simple
computational convenience played a large role in determining which kinds of rela-
tions one would attempt to “fit” to the data. (For example, one would assume purely
­backward-looking causal relations among a set of variables that happened to be part
of one’s dataset because of the convenience of estimating the coefficients of relations
Vol. 1 No. 1 woodford: elements of the new synthesis 271

assumed to be of that form.) Now, instead, specifications that are intended to repre-
sent structural relations are derived from explicit decision problems of households
or firms. Adjustment delays are allowed for, but these are assumed to be constraints
that are taken into account by optimizing agents rather than arbitrary modifications
of the optimal decision rule.
Relatively atheoretical methods, such as the estimation of unrestricted autore-
gressive or vector-autoregressive models, continue to be important in empirical
macroeconomics, and have become more important since the 1980s. But a clearer
distinction is now made between work that aims only at the characterization of data
under a priori assumptions that are as weak as possible, and work that tries to repre-
sent structural relations. Pure data characterization is useful as a way of establishing
facts that structural models should be expected to explain, but it is not a substitute
for structural modeling. Instead, the two types of empirical work are complemen-
tary, two distinct parts of a single empirical research program that seek to develop
empirically validated quantitative models that can be sensibly used in counterfactual
policy analysis.
Modern macroeconomic modelers also depart from the early postwar literature in
taking a more eclectic approach to the estimation of model parameters and testing of
model predictions. One reason is that the modern style of structural model, with its
deeper behavioral foundations, is not merely a prediction about the statistical prop-
erties of one particular type of data. Instead, it simultaneously makes claims about
many things, both individual behavior and the behavior of aggregates and short-run
dynamics and long-run averages, so that many different kinds of data are relevant, in
principle, to model parameterization and to judging the model’s empirical relevance.
As a result, many different approaches to empirical analysis provide complementary
perspectives on the quantitative realism of a given model.2
It sometimes appears to outsiders that macroeconomists are deeply divided over
issues of empirical methodology. There continue to be, and probably will always
be, heated disagreements about the degree to which individual empirical claims are
convincing. A variety of empirical methods are used, both for data characterization
and for estimation of structural relations, and researchers differ in their taste for spe-
cific methods, often depending on their willingness to employ methods that involve
more specific a priori assumptions. But the existence of such debates should not
conceal the broad agreement on more basic issues of method. Both “calibrationists”
and the practitioners of Bayesian estimation of DSGE models agree on the impor-
tance of doing “quantitative theory.” Both accept the importance of the distinction
between pure data characterization and the validation of structural models, and both
have a similar understanding of the form of model that can be properly regarded as
structural.

Third, it is now widely agreed that it is important to model expectations as endog-

enous, and, in particular, that it is crucial in policy analysis to take into account the

2
V. V. Chari and Patrick J. Kehoe (2007) refer to a “big-tent approach to data analysis” that “allows us to
look for clues about the quantitative magnitudes of various mechanisms in a wide variety of sources using a wide
variety of methods.”
272 American Economic Journal: MAcroeconomics JANUARY 2009

way in which expectations should be different in the case that an alternative policy
were to be adopted. This was, of course, the point of the celebrated Lucas (1976) cri-
tique of traditional methods of econometric policy evaluation. Because of sensitivity
to this issue, it is now routine in positive interpretations of macroeconomic data and
in normative analyses of possible economic policies to assume rational expectations
on the part of economic decision makers in accordance with the methodology intro-
duced by the New Classical literature of the 1970s.
Acceptance of the methodological precepts of the “rational expectations revolu-
tion” has not, however, meant acceptance of the view that stabilization policy is
necessarily ineffective, as early commentary on the implications of that develop-
ment often assumed. In modern DSGE models with sticky wages and/or prices,
the fact that wage- and price-setting decisions are made on the basis of rational
expectations has important consequences for the nature of the tradeoff between
inflation and real activity, and for the way to think about the effects of policy.
One cannot expect a simple answer about the effects of a given policy action,
independent of whether the action is anticipated in advance or not, of whether the
change in policy is expected to be persistent or not, and of what the policy author-
ity announces about its policy intentions. Yet, these models typically imply that
alternative systematic policies should lead to very different patterns of evolution
of real activity, and that it should be quite possible, given sufficiently accurate
real-time data, to design feedback rules for policy that achieves a greater degree of
stabilization than less “activist” policies. As shown by John B. Taylor (1979) and
a large subsequent literature, optimal control techniques (suitably adapted to deal
with forward-looking structural relations) can be used to design ideal stabilization
policies given such a model.

Fourth, it is now widely accepted that real disturbances are an important source
of economic fluctuations. The hypothesis that business fluctuations can be largely
attributed to exogenous random variations in monetary policy has few if any remain-
ing adherents.
While studies such as those of Julio J. Rotemberg and Woodford (1997) or
Christiano, Eichenbaum, and Evans (2005) estimate the effects of exogenous dis-
turbances to monetary policy and assess the ability of structural models to account
for these effects. This is because of the usefulness of this particular empirical test
as a way of discriminating among alternative models and not because of any asser-
tion that such disturbances are a primary source of aggregate variability. In fact,
Altig et al. (2005) conclude that monetary policy shocks (identified by their VAR)
account for only 14 percent of the variance of fluctuations in aggregate output at
business cycle frequencies. Smets and Wouters (2007) find that monetary policy
shocks account for less than 10 percent of the forecast error variance decomposition
for aggregate output at any horizon.
By “real disturbances,” I do not mean solely the “technology shocks” emphasized
by the real business cycle theory of the 1980s. Modern empirical DSGE models, like
that of Smets and Wouters, include a variety of types of disturbances to ­technology,
preferences, and government policies (including fiscal shocks), and part of the
variability in aggregate time series is attributed to each of these types of shocks.
Vol. 1 No. 1 woodford: elements of the new synthesis 273

Technology shocks of one type or another are typically among the more important
disturbances, however.3
More generally, the traditional Keynesian view of business cycles, according to
which fluctuations are caused by a variety of types of real disturbances that affect
economic activity solely through their effects on aggregate demand while aggregate
supply evolves as a smooth trend, is no more confirmed by the modern models than
is the pure monetarist view. While empirical DSGE models like that of Smets and
Wouters (2007) do allow one to speak meaningfully of short-run departures from
the “equilibrium” or “natural” level of real activity, that “natural rate of output” is
not at all a smooth trend, and the disturbances that result in temporary departures
from the natural rate typically also shift the natural rate.
At the same time, the claim that purely monetary disturbances are not the main
source of business fluctuations does not imply that monetary policy is irrelevant
in explaining such fluctuations. Empirical DSGE models with sticky wages, sticky
prices, “sticky information,” or some combination of these frictions, generally imply
that the equilibrium effects of real disturbances depend substantially on the charac-
ter of systematic monetary policy, that is, on the nature of the consistent feedback
from aggregate conditions to central bank policy. Hence, the character of historical
monetary policy still plays an important role in the explanation of observed business
cycle patterns, and there remains an important degree of scope, at least in principle,
for improved stabilization through the design of an appropriate monetary policy.
While there is not agreement yet on the degree to which the greater stability of the
United States and other economies in recent decades can be attributed to improve-
ments in the conduct of monetary policy, the hypothesis that monetary policy has
become conducive to stability, for reasons argued by Taylor, among others, is cer-
tainly consistent with the general view of business fluctuations presented by current-
­generation empirical DSGE models.

Fifth, monetary policy is now widely agreed to be effective, especially as a means

of inflation control. The fact that central banks can control inflation if they want
to (and are allowed to) can no longer be debated after the worldwide success of
disinflationary policies in the 1980s and 1990s. It is also widely accepted that it is
reasonable to charge central banks with the responsibility of keeping the inflation
rate within reasonable bounds.
In this respect, the monetarist school has won an important debate with the post-
war Keynesians. But this does not mean that variations in real activity, in capacity
utilitization, and in other determinants of supply costs are not still viewed as impor-
tant proximate causes of changes in the general level of prices. The Phillips curve
is alive and well in current vintage empirical DSGE models, and a recent extensive
literature has documented the degree to which the evolution of measures of real

3
Altig et al. (2005) consider two types of technology shocks, a “neutral” shock and an investment-specific
shock, and conclude that together these account for 28 percent of the variance of aggregate output at business
cycle frequencies. In the estimated DSGE model of Smets and Wouters (2007), the corresponding two shocks
account for about half of the GDP forecast error variance at a 10-quarter horizon.
274 American Economic Journal: MAcroeconomics JANUARY 2009

marginal cost can explain variations in the inflation rate.4 But it is now understood
that neither the theoretical plausibility nor the empirical success of such models
implies that inflation is determined by factors over which monetary policy has little
influence. Not only is a Phillips curve in itself incomplete as a model of inflation
(as it is merely a relation among endogenous variables), but the structure of general
equilibrium models implies that household and firm behavior alone can, at most,
determine the structure of relative prices rather than the absolute level of (monetary)
prices, so that it must be government policy that supplies the “nominal anchor” if
one is to exist.
Nor does accepting that monetary policy is the ultimate determinate of the general
level of prices mean that it is necessary to understand prices as being determined by
the quantity of money, and still less that inflation control requires careful monitor-
ing of money supply measures. Monetary policy need not be identified with control
of the money supply. And at most of the central banks with explicit commitments
to an inflation target, monetary aggregates play little if any role in policy delibera-
tions. Many empirical DSGE models, such as the Smets-Wouters model, make no
reference to money, though they include an equation describing monetary policy and
imply that the specification of that equation matters a great deal for the dynamics of
both nominal and real variables.5

II.  Remaining Disagreement

While the study of business fluctuations is no longer driven by the kind of dis-
agreements about the foundations of macroeconomic analysis that characterized the
decades following World War II, important differences in methodological orienta-
tion remain among macroeconomists. Probably the most obvious divisions concern
the importance attached, by different researchers, to work aspiring to “pure sci-
ence” relative to work intended to address applied problems. This leads to differing
evaluations of the degree of progress recently achieved in the field, which might
suggest to outside observers that the foundations of the subject remain fundamen-
tally contested, even though, as I have argued above, there are not really alternative
approaches to the resolution of macroeconomic issues any longer.
One hears expressions of skepticism about the degree of progress in macroeconom-
ics from both sides of this debate, from those who complain that macroeconomics
is not concerned enough with scientific rigor and from those who complain that the
field has been exclusively concerned with it. Some protest that the current generation
of empirical DSGE models, mentioned above as illustrations of the new synthesis in
methodology, have not been validated with sufficiently rigorous methods to be used
in policy analysis (e.g., Chari, Kehoe, and Ellen R. McGrattan, 2008). Proponents
of this view do not typically assert that some other available model would be more

4
For reviews of this literature, see, among others, Jordi Galí, Mark Gertler, and J. David Lopez-Salido (2005),
Argia M. Sbordone (2005), and Eichenbaum, and Jonas D. M. Fisher (2007).
5
See Woodford (2008) for further discussion of the role of monetary aggregates in current vintage DSGE
models for monetary policy analysis.
Vol. 1 No. 1 woodford: elements of the new synthesis 275

reliable for that purpose. Instead, they argue that scholars with intellectual integrity
have no business commenting on ­policy issues.
Lest there be confusion on this point, I should clarify that in asserting the exis-
tence of convergence in methodology, I do not mean to claim that all important theo-
retical and empirical issues in macroeconomics have been resolved. There is as yet
little certainty about how best to specify an empirically adequate model of aggre-
gate fluctuations. While efforts such as those of Christiano, Eichenbaum, and Evans
(2005) or Smets and Wouters (2003, 2007) are encouraging, it would be foolish to
claim that these models represent settled truth. Work in this vein is sufficiently new
that one can hardly be surprised if, a decade from now, the best available models for
use in policy analysis differ from these in important (though as yet unforeseeable)
respects.
This does not mean that using such models as a basis for counterfactual policy
simulations involves doubtful claims about the empirical validity of the models.
Policy decisions must be constantly made despite policymakers’ uncertainty about
the precise effects of alternative choices. Even if one restricts the aims of ­policy
(say, to a concern purely with inflation stabilization), difficult decisions must be
made as to how to employ the available instruments of policy in the service of
that goal. One can only base policy advice on provisional models, unless one is
willing to allow policy to be made on even more ill-informed grounds. Of course,
honest advice will be open about the places where there are obvious grounds for
uncertainty about the provisional conclusions obtained from currently available
models, and prudent policy decisions will seek to be robust to possible errors
resulting from reliance on a faulty model. Questions about the robustness of the
conclusions from policy analyses can be, and are, addressed within the current
mainstream paradigm for macro­economic analysis. Andrew Levin et al. (2005)
provides a good example.
Nor is it convincing to suggest that improved policy advice might be obtained
more reliably by devoting current research efforts to the clarification of “first prin-
ciples” of macroeconomic theory, in the expectation that progress in the understand-
ing of fundamental theory should eventually eliminate uncertainty about policy
issues as well. While research aimed purely at theoretical clarification can be valu-
able, there is little reason to expect that the issues clarified will be the ones that mat-
ter for the improvement of policy, unless researchers directly address questions of
public policy in their work, or at least address questions raised by the literature that
analyzes policy issues.
In his paper, Mankiw (2006, 44) criticizes the current state of macroeconomics
from the opposite perspective of the one just discussed. In Mankiw’s view, since the
1970s, too much stress has been placed on the development of macroeconomics as
a science with clear, conceptual foundations, and too little on macroeconomics as
a branch of engineering, a body of lore about how to solve problems. As a result,
he argues the conceptual developments of the past several decades have “had little
impact on practical macroeconomists who are charged with the messy task of con-
ducting actual monetary and fiscal policy.” In this respect, he asserts all of the dif-
ferent, recent currents of thought among academic macroeconomists have equally
failed.
276 American Economic Journal: MAcroeconomics JANUARY 2009

For example, Mankiw states that the models used for quantitative policy analy-
sis in policy institutions like the Federal Reserve “are the direct descendents of
the early modeling efforts of Klein, Modigliani, and Eckstein. Research by new
­classicals and new Keynesians has had minimal influence on the construction of
these models” (Mankiw 2006, 42). But this is a misleading picture of the current
state of affairs. It is true that the modeling efforts of many policy institutions can
be reasonably seen as an evolutionary development within the macroeconometric
modeling program of the postwar Keynesians. Thus, if one expected, with the
early New Classicals, that adoption of the new tools would require building from
the ground up, one might conclude that the new tools have not been put to use. But
in fact they have been put to use, only not with such radical consequences as had
once been predicted.
The Fed’s current main policy model, the FRB/US model, was developed in the
mid-1990s, before the recent renaissance of research on empirical DSGE models,
but it incorporated many insights from the research literature of the 1970s and
1980s. As Flint Brayton et al. (1997) explained, it departed sharply from the previ-
ous generation of Federal Reserve Board models in giving much more attention
to modeling the endogenous evolution of expectations and allowed model simula-
tions to be conducted under an assumption of model-consistent (or rational) expec-
tations, among other possibilities. The modelers also gave much more attention to
ensuring that the model implied long-run dynamics consistent with an equilibrium
model. For example, that the dynamics of both government debt and the external
debt satisfy transversality conditions. Finally, adjustment dynamics were mod-
eled not by simply adding arbitrary lags to structural relations, or even by ad hoc
“partial adjustment” dynamics, but on the basis of dynamic optimization problems
for the decision makers that incorporated explicit (though flexibly parameterized)
adjustment costs.
Around the same time, new macroeconomic models were introduced at other cen-
tral banks, such as the Bank of Canada’s Quarterly Projection Model (Donald Coletti
et al. 1996) and the Reserve Bank of New Zealand’s Forecasting and Projection
System (Richard Black et al. 1997), that were similarly modern in their emphasis
on endogenous expectations and long-run dynamics consistent with an equilibrium
model. These were not mere research projects, but models used for practical policy
deliberations under the “forecast targeting” approach to monetary policy employed
by both central banks beginning in the 1990s.
In the decade since, as the scholarly literature has devoted more attention to the
development of models that are both theoretically consistent and empirically tested,
the rate at which ideas from the research literature are incorporated into model-
ing practice in policy institutions has accelerated, with forecast-targeting central
banks often playing a leading role. Examples of the more theoretically ambitious
recent projects include the International Monetary Fund’s Global Economy Model
(Tamim Bayoumi et al. 2004), the Swedish Riksbank’s RAMSES (Malin Adolfson
et al. 2007), the European Central Bank’s New Area-Wide Model (Kai Christoffel,
Guenter Coenen, and Chris Warne 2007), and the Norwegian Economic Model
(NEMO) under development by the Norges Bank (Leif Brubakk et al. 2006). All of
these are coherent DSGE models reflecting the current methodological consensus
Vol. 1 No. 1 woodford: elements of the new synthesis 277

discussed above, and matched to data through calibration or Bayesian estimation.6

And they are also all models developed by policy institutions for use in practical
policy analysis.7
Mankiw also states that central bankers find no use for modern developments
in macroeconomics in their thinking about the economy and the decisions they
face. As evidence, he cites the memoir of former Federal Reserve Governor Larry
Meyer, saying that “Meyer’s analysis of economic fluctuations and monetary pol-
icy is intelligent and nuanced, but it shows no traces of modern macroeconomic
theory. It would seem almost completely familiar to someone who was schooled in
the ­neoclassical-Keynesian synthesis that prevailed around 1970 and has ignored
the scholarly literature ever since” (Mankiw 2006, 40). This does not sound like
Larry Meyer the Federal Reserve governor to me, though like Harvard professors,
he probably adopts a simpler manner when addressing the general public than when
addressing his peers. Mankiw’s interpretation also assumes, yet again, that accep-
tance of any part of the scholarly literature since 1970 would require thorough repu-
diation of pre-1970 ways of thinking. This is not so.8
In any event, it is hard to see how anyone could say this of the current members
of the Federal Open Market Committee. The speeches of Ben S. Bernanke and
other current governors and Federal Reserve Bank presidents are often laced with
footnotes to the recent research literature. When the Fed recently introduced a new
policy of discussing the quantitative forecasts of the FOMC members as part of
the Committee’s published minutes, Governor Frederic S. Mishkin explained the
policy change to the public in a speech titled “The Federal Reserve’s Enhanced
Communication Strategy and the Science of Monetary Policy” (Mishkin 2007).
This suggests to me the “disconnect” between the science of macroeconomics and
the engineering side is not as great as Mankiw claims.9
There remains, of course, a great deal for macroeconomists to be humble about,
as Mankiw urges. The reduced level of dissension within the field does not mean
that we have an adequate understanding of the problems addressed by it. One can
still hope for much more progress, and competition among contending approaches
and hypotheses will almost inevitably be part of the process through which such
progress can occur. But the current moment is one in which prospects are unusually
bright for progress with lasting consequences, due to the increased possibility of pro-
ductive dialogue between theory and empirical work on the one hand, and between
theory and practice on the other.

6
RAMSES and the New Area-Wide Model are estimated models. The teams responsible for GEM and NEMO
have indicated an intention to estimate their models using Bayesian methods as well, though only calibrated ver-
sions of the models are in use at present.
7
There are also a great many other methodologically ambitious modeling projects underway within the
research staffs of policy institutions including the Federal Reserve System. Here, I have mentioned only models
that are already being used, or have clearly been developed to be used, in policy analysis by the institution respon-
sible for developing the model.
8
For the extent to which aspects of the conventional wisdom circa 1970 have been repudiated by practicing cen-
tral bankers, and the role of the academic literature in this development, see Goodfriend (2007). In Goodfriend’s
characterization, “the story is one of mutually reinforcing advances in theory and practice” (Goodfriend 2007,
57).
9
For further comment on Mankiw’s argument, see David Warsh (2006).
278 American Economic Journal: MAcroeconomics JANUARY 2009

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