Different types of macroeconomic models include simple theoretical models, empirical prediction models, dynamic stochastic general equilibrium models, and agent-based computational economics models. These models use various methods to understand and predict macroeconomic outcomes, including aggregate measures and microeconomic relationships. Economists continually refine these models to improve their accuracy.
The field of economics is filled with different types of macroeconomic models designed to achieve different goals. Included in the different classes are simple theoretical models (STM), empirical prediction models (EFM), dynamic stochastic general equilibrium models (DSGE), and agent-based computational economics (ACE) models. STM macroeconomic models normally consist of simple diagrams and/or equations that aim to describe an economy as a whole. EFM models primarily use historical data and observations in an attempt to predict future macroeconomic outcomes. Models such as the DSGE include frameworks that seek to predict the effects of changes in economic policy, while ACE models aim to understand macroeconomic relationships by going somewhat into microeconomic detail.
Macroeconomic models, such as STMs, are composed of diagrams and/or equations and deal with several variables. These include aggregate measures, such as gross domestic product (GDP) and unemployment rates. The STM models include the Money Savings Model (IS/LM) with Savings Over Investment/Cash Preference and the Mundell-Fleming Model. The IS/LM model, for example, has the main function of showing how interest rates are related to real output relative to the goods and services sector and the money market.
EFM models are built to use statistical methods to attempt to predict possible scenarios. These models use historical data to estimate and understand the relationship between different macroeconomic variables. While STM models are primarily concerned with aggregate measures of an entire economy, EFM models sometimes go into detail. In doing so, for example, they can study the relationship between employment and investment in a given sector.
Models like DSGE include two main opposing contexts. One is known as the true business cycle model and the other is the new Keynesian DSGE model. The real business cycle model consists of macroeconomic models based on a theory that, among other things, fluctuations in the business cycle are largely justified by real shocks. In economics, these are unexpected and unpredictable events that have negative or positive impacts on economies. The new Keynesian DSGE framework supports models based primarily on the theory that governments and central banks should intervene in an economy when necessary to stabilize the economic environment.
Finally, ACE models attempt to decompose macroeconomic relationships into more industry-focused microeconomic relationships. These models identify active individual agents in an economy, such as households and firms. Basically, the models study the interaction between said agents. In a sense, after studying a significant number of agent interactions, individual findings can then be combined with others to create aggregate macroeconomic relationships, which can then be studied. Additionally, most macroeconomic models are known to have their strengths and weaknesses, so economists are continually tweaking them in an effort to reinforce those strengths.
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