In this final chapter, we discuss recent developments in the interaction of events and ideas and assess their role for the evolution of macroeconomics.

Recent developments may be an important determinant of the future evolution of macroeconomics, but readers should be fully aware of the old Danish saying: “It is difficult to make predictions, especially about the future.”¹

Macroeconomics started out in the 1930s based partly on ad hoc Keynesian postulates, quite removed from the axioms of microeconomics.

Macroeconomics has experienced significant progress in the 80 or so years since the publication of the General Theory. There has been progress in both growth theory and the theory of aggregate fluctuations. The progress in the theory of economic growth has been largely consensual, focusing on the differences between representative household and OLG models, and the roles of human capital, externalities, and endogenous technical progress. However, the evolution of the theory of aggregate fluctuations has been characterized by sharp divisions and a lot of acrimony. After all, macroeconomics was founded on such a division: that between Keynes and the “classics.” New divisions emerged in the 1950s and the 1960s between Keynesians and monetarists. Yet more divisions sprang up following the introduction of the rational expectations hypothesis, and the final set of divisions emerged in the 1980s, following the introduction of new classical and new Keynesian DSGE models.²

Over the past 20 years or so, these sharp divisions have been partly bridged, as macroeconomists of different persuasions communicate through the use of models with more common elements than before. In any case, the old divisions generated more heat than light.

Many of the remaining differences may be further resolved through the emergence of new, richer models and new empirical evidence, but many of the existing differences are due to the inconclusiveness of such evidence, as well as the different interpretations and approaches taken with regard to empirical evaluation, prediction, and policy analysis.

So let us start by reviewing developments in macroeconomics since the financial crisis of 2008–2009, and then go on to discuss the interaction of events and ideas and the role of empirical research in macroeconomics. We will then examine the role of theoretically based empirical models in prediction and policy analysis, and shall end with some tentative conclusions about the likely future evolution of macroeconomics.

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