The DSGE quarrel

13 December, 2017 at 11:04 | Posted in Economics | Leave a comment

A recent paper by Christiano, Eichenbaum and Trabandt (C.E.T.) on Dynamic Stochastic General Equilibrium Models (DSGEs) has generated quite a reaction in the blogosphere …

The-DSGE-Model-Quarrel-Again-e1512989462377Bradford Delong points out that new Keynesian models were constructed to show that old Keynesian and old Monetarist policy conclusions were relatively robust, and not blown out of the water by rational expectations … The DSGE framework was then constructed so that new Keynesians could talk to RBCites. None of this has, so far, materially advanced the project of understanding the macroeconomic policy-relevant emergent properties of really existing industrial and post-industrial economies …

Lars Syll thinks that ‘rigorous’ and ‘precise’ DSGE models cannot be considered anything other than unsubstantiated conjectures as long as they aren’t supported by evidence from outside the theory or model, and no decisive empirical evidence has been presented. Advocates of DSGE modelling want to have deductively automated answers to fundamental causal questions. But to apply ‘thin’ methods we have to have ‘thick’ background knowledge of what’s going on in the real world, and not in idealised models. Conclusions can only be as certain as their premises. The modelling convention used when constructing DSGE models makes it impossible to fully incorporate things that we know are of paramount importance for understanding modern economies. Given all these fundamental problems for the use of these models and their underlying methodology, it is beyond understanding how the DSGE approach has come to be the standard approach in ‘modern’ macroeconomics. DSGE models are based on assumptions profoundly at odds with what we know about real-world economies. That also makes them little more than overconfident story-telling devoid of real scientific value …

Brian Romanchuk at Bond Economics thinks that the the recent attempt at a defence by C.E.T. was such a spectacular intellectual failure that it is not worth taking seriously … One could easily raise doubts about other methodologies, but the paper by C.E.T. went completely off the rails by arguing that no other economic modelling methodology even exists.

Silvia Merler/Bruegel

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