IGIDR Working Paper : Abductive Reasoning in Macroeconomics

NO : WP-2016-022

AUTHOR :  Ashima Goyal

TITLE :  Abductive Reasoning in Macroeconomics


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

Keywords :Abduction; Evolution of macroeconomics; Global financial crisis; Aggregate demand
and supply.
JEL Code :E10, E44, E32

Weblink : http://www.igidr.ac.in/pdf/publication/WP-2016-022.pdf