What drives macro-economic behavior?

[admin]

We've long been critical about macro-economic models, especially those complex ones based on the proper maximizing microfoundations. We prefer a more empirical approach, simply looking around in the world economy and try to figure out policies that work.

However, in the context of moving economies, especially after the financial crisis, the role of expectations deserves a re-evaluation:

But some kind of foundation is still required for macroeconomics. That is why I’m very excited by my friend Andrei Shleifer’s new book with Nicola Gennaioli, “A Crisis of Beliefs: Investor Psychology and Financial Fragility.” The book puts expectations at the center of thinking about economic fluctuations and financial crises — but these expectations are not rational. In fact, as all the evidence suggests, they are subject to systematic errors of extrapolation. The book suggests that these errors in expectations are best understood as arising out of cognitive biases to which humans are prone.

The financial crisis and the foundations for macroeconomics | Larry Summers

The work of Roger Farmer (see here, for instance) also goes this way.