Get started with macro modeling

In this chapter, we demonstrate a way to get started with system dynamics modeling of a national economy, using a modular software framework called the MacroLab Template. The Template can be customized to reflect a modeler’s hypotheses about how an economy works. To illustrate the modeling process, we use a small dynamic macroeconomic model that is easy to build, understand, critique, and modify or totally replace. When the modeler adds particular behavioral equations in one sector of a Template-based model, the framework motivates thinking about how they should fit together with equations in other sectors. While illustrating how to replace one sub-model with another, we emphasize that the viability of an alternative hypothesis requires analysis of how the whole system responds to the change in structure. Alterations in one sub-model may necessitate alterations in others. The process requires thinking of an ensemble of alternative hypotheses and how they perform together rather than separately. The Template is also useful for comparing alternative macroeconomic theories, which is particularly important in a time of serious questioning of the assumptions, methods, and value of conventional models. Supplementary materials include a video-recorded tutorial and access to the model discussed in the chapter.