Abductive reasoning in macroeconomics

Ashima Goyal

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: Macroeconomic analytical frameworks change with events they are unable to explain. The process is closer to abductive reasoning that is based on both events and analysis, unlike induction which is data-based and deduction where analysis dominates. Abduction reasons backwards from the outcome, to deduce the framework with which it is compatible. Therefore it is useful to study how macroeconomic conceptual frameworks evolve after anomalous outcomes such as crises. The post-crisis churning is assessed from this perspective using criteria such as greater generality, systemic feedback, and structural aspects. Abductive reasoning is also used to extract the structure of aggregate demand and supply consistent with the observed negative correlation inflation and growth in India. If prolonged growth slowdowns do not reduce inflation, it suggests underlying aggregate supply is elastic but volatile, so that supply-side issues, not excess demand, are primary inflation drivers. Monetary and fiscal policy need to focus on elements that reduce costs, while avoiding sharp cuts in aggregate demand.

Keywords: Abduction; Evolution of macroeconomics; Global financial crisis; Aggregate demand and supply (search for similar items in EconPapers)
JEL-codes: E10 E32 E44 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2016-07
New Economics Papers: this item is included in nep-fdg and nep-mac
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Abductive Reasoning in Macroeconomics (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ind:igiwpp:2016-022

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