We begin with Pissarides's model, which I described in the first lecture. What is his purpose in offering that model? One presumes that it is to explain the facts. But oddly only one empirical fact is mentioned in the paper – namely, that unemployment and vacancies arrange themselves in counterclockwise loops when plotted against one another. Nevertheless, Pissarides proposes to test his model by estimating versions of equations (1.5) and (1.6) and checking to see that the quantitative and qualitative implications of the model actually hold in the data. The model would then be regarded as an explanation of its true implications. The fact that the model makes no reference to the particularities of any place or time, but only broadly and implicitly to a market-based economy, suggests that he would generalize and claim that the success of his model on one set of data (one country, one sample period) justifies using it as a generic explanation of other similar sets of data, although one could always challenge its relevance by testing it directly on the similar data sets. This is, I think, a fairly common understanding among economists of the purposes of models. The methodological question that it raises is this: what is the explanatory relationship between a macroeconomic model and empirical observations?

A STANDARD VIEW

It is much easier to make a persuasive case for a view if one has another plausible view that it can refute.