Modeling the Economy as a Watch or as a Cloud

Abstract We argue that the mainstream macroeconomic models (DSGE-models) are models that operate like “watches”, while behavioural macroeconomic models operate like “clouds”. We define what this means. We contrast the predictions these two simple canonical macroeconomic models make about the transmission of supply shocks. We find that in the cloud model the fog surrounding the transmission of these shocks is much denser than in the watch model, making it difficult to make conditional forecasts.