# Microfoundation

Under the microeconomic foundations (short microfoundation ) macroeconomic theory is understood in economics, the direct discharge of macroeconomic behavior equations from the microeconomic (ie microeconomic) maximizing behavior (utility maximization of households, profit maximization of the company).

The derivation of macroeconomic functions from microeconomic relationships is one of the most difficult tasks in economic theory and generally represents an unsolvable aggregation problem. Microfounding is intended to circumvent this unsolvable aggregation problem by postulating an analogy between microeconomic and macroeconomic behavior equations.

## Applications and criticism

The New Macroeconomics (including New Classical Macroeconomics , New Keynesianism ) is predominantly characterized by macroeconomic models that have a completely microeconomic foundation.

Nowadays, DSGE models are used in monetary economics , which are based on the optimization behavior of the agents of the model. A typical example of a utility function in such a New Keynesian model is:

${\ displaystyle E_ {t} \ sum _ {i = 0} ^ {\ infty} \ beta ^ {i} \ left [{\ frac {C_ {t + i} ^ {1- \ sigma}} {1- \ sigma}} + {\ frac {\ gamma} {1-b}} \ left ({\ frac {M_ {t + i}} {P_ {t + i}}} \ right) ^ {1-b} - \ mathrm {X} {\ frac {N_ {t + i} ^ {1+ \ eta}} {1+ \ eta}} \ right]}$.

The household maximizes the expected present value of various consumer goods. Such complex functions are specifically created in order to achieve mathematical simplifications and to make the results partly interpretable. However, it must be questioned critically how such a function can be justified. The question of to what extent this function reflects the behavior of an individual remains unanswered. Microfounding in this sense does not mean that the assumptions of a model are particularly well founded by microeconomic research, but only that the optimization concept, the benefit maximization, is incorporated into a model.

There are also micro-founded models in business cycle theory . Early attempts such as the multiplier-accelerator model and its sensitivity to certain parameter constellations aroused criticism early on, and the dynamic profiles of the cycles generated were unsatisfactory from an empirical point of view.

Overall, the microfoundation is not without controversy because, in contrast to macroeconomic theories, empirical testing has not been carried out with these foundation approaches.

With the concept of rationality and optimization behavior, microfounded macroeconomics also takes on all known weaknesses (cf. Homo oeconomicus in macroeconomics or criticism of Homo oeconomicus ).

## literature

• N. Gregory Mankiw and David Romer, eds., (1991), New Keynesian Economics . Vol. 1: Imperfect competition and sticky prices , MIT Press, ISBN 0-262-63133-4 . Vol. 2: Coordination Failures and Real Rigidities . MIT Press, ISBN 978-0-262-63134-1 .
• Kube, Ralf. Microfoundation of business cycle theory using simulation methods . Physica-Verlag, 1993.
• Kirchgässner, Gebhard. On the microfoundation of macroeconomics: some methodological comments. Contributions to micro- and macroeconomics. Springer Berlin Heidelberg, 2001. 229-242.

## Individual evidence

1. a b Microeconomic foundation of macroeconomic theory - definition in the Gabler Wirtschaftslexikon
2. ^ Pollak, Helga: Frankfurt economic and social science studies . No. 15. Duncker & Humblot, 1966. Pages 23/24
3. ^ Walsh, Carl E.: Monetary theory and policy . MIT press, 2010. p. 331.
4. Kube, Ralf: Microfoundation of the business cycle theory using simulation methods . Physica-Verlag, 1993. p. 1.
5. Kube, Ralf: Microfoundation of the business cycle theory using simulation methods . Physica-Verlag, 1993. p. 2.