Romer advanced macroeconomics  pp232


A second major dimension along which approaches vary is partialequilibrium
versus general-equilibrium. Consider, for example, the issue we
will discuss in Part B of Chapter 6 of whether small costs of price adjustment
can cause substantial nominal rigidity. At one extreme, one could focus on a
single firm’s response to a one-time monetary disturbance. At the other, one
could build a dynamic model where the money supply follows a stochastic
process and examine the resulting general equilibrium.
Again, there are strengths and weaknesses to both approaches. The focus
on general equilibrium guards against the possibility that the effect being
considered has implausible implications along some dimension the modeler
would not otherwise consider. But this comes at the cost of making
the analysis more complicated. As a result, the analysis must often take a
simpler approach to modeling the central issue of interest, and the greater
complexity again makes it harder to see the intuition for the results.
It is tempting to say that all these approaches are valuable, and that
macroeconomists should therefore pursue them all. There is clearly much
truth in this statement. For example, the proposition that both partialequilibrium
and general-equilibrium models are valuable is unassailable.
But there are tradeoffs: simultaneously pursuing general-equilibrium and
partial-equilibrium analysis, and fully specified dynamic models and simple
static models, means that less attention can be paid to any one avenue. Thus

saying that all approaches have merit avoids the harder question of when
different approaches are more valuable and what mix is appropriate for analyzing
a particular issue. Unfortunately, as with the issue of calibration versus
other approaches to evaluating models’ empirical performance, we have
little systematic evidence on this question. As a result, macroeconomists
have little choice but to make tentative judgments, based on the currently
available models and evidence, about what types of inquiry are most promising.
And they must remain open to the possibility that those judgments will
need to be revised.