Modern macro — a total waste​ of time

11 Aug, 2018 at 11:33 | Posted in Economics | 2 Comments

While one can understand that some of the elements in DSGE models seem to appeal to Keynesians at first sight, after closer examination, these models are in fundamental contradiction to Post-Keynesian and even traditional Keynesian thinking. The DSGE model is a model in which output is determined in the labour market as in New Classical models and in which aggregate demand plays only a very secondary role, even in the short run.

In addition, given the fundamental philosophical problems presented for the use of DSGE models for policy simulation, namely the fact that a number of parameters used have completely implausible magnitudes and that the degree of freedom for different parameters is so large that DSGE models with fundamentally different parametrization (and therefore different policy conclusions) equally well produce time series which fit the real-world data, it is also very hard to understand why DSGE models have reached such a prominence in economic science in general.

Sebastian Dullien

Neither New Classical nor ‘New Keynesian’ microfounded DSGE macro models have helped us foresee, understand or craft solutions to the problems of today’s economies. But still most young academic macroeconomists want to work with DSGE models. UnknownAfter reading Dullien’s article, that certainly should be a very worrying confirmation of economics — at least from the point of view of realism and relevance — becoming more and more a waste of time. Why do these young bright guys waste their time and efforts? I think maybe Frank Hahn gave the truest answer when interviewed on the occasion of his 80th birthday, he confessed that some economic assumptions didn’t really say anything about ‘what happens in the world,’ but still had to be considered very good ‘because it allows us to get on this job.’

2 Comments

  1. It is really difficult to imagine anyone the least bit curious about how the actual economy works being at all interested in DSGE modeling. I cannot imagine what problem this approach solves, other than that it gives employment to bad mathematicians with no interest in the structures or functions of the political economy as an emergent system.

  2. It’s a bit of a catch-22. Unfortunately economics in the way it is set up attracts the sort of people who like doing things that way, so economics ends up looking more and more like the way it does. There is also a lot of self-serving language used to describe DSGE – ‘rigorous’, ‘sophisticated’, ‘modern’. It lures the unsuspecting into thinking it has something of value. People that have already had a bit of philosophy or history under their belts, and from my experience many mathematicians too, know pretty quickly what they amount to.


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