DSGE models are consistent. And totally useless!

11 May, 2019 at 12:33 | Posted in Economics | 4 Comments


Thanks to JW Mason for directing us to this ‘interesting’ piece from Reserve Bank of Australia.


  1. I got my first lesson or advice on modelling as a 2nd year undergraduate student in 1974 while attending a seminar at the Bangladesh Institute of Development Studies (BIDS); and I am still guided by that. The advice was from Prof. Brian Reddaway of Cmabridge who was a visiting fellow at the BIDS and the seminar was on farm size and efficiency by a very bright young economist. When everyone in the room was full of praise for the rigour and beauty of the model, Reddaway had this to say; “if a 2 variable scatter plot does not tell a plausible story, then foregt about complicated modelling”. Suddenly there was a pin-drop silence in the room as people began pondering about the relevance of the “logical consitency” of results for the peasant small holding agriculture of Bangladesh they know of; the logically consistent results made no sense!
    Later I was more convinced of Reddaway’s advice as a graduate student in the early 1980s at the University of Manitoba which took an eclectic approach to the monetarist/new classical onslaught againt the economics of Keynes (“bastard Keynesians” included). Professor Clarence Barber used hand drawn 2-variable scatter plots of time-series on graph papers to teach us monetary economics. He would distribute those graphs and ask what story they told; did they tell a monetarist or Keynesian story? His 2-variable simple scatter plots were sufficient to demolish rigorous, logically/mattenatically consistent monetarist/new classical models.
    That’s where we were introduced to Alex Leijonhufvd’s On Keynesian Economics and the Economics of Keynes, which I still have on my shelf. We were also introduced to Hyman Minsky.
    One thing I learned was the importance of knowing economic history. Unfortunately, economic history has been pushed out of most of the graduate schools with the dominance of mathematics and econometrics – thus, we lost realism in preference for rigour regardless of thier irrelevance.
    Footnote: The bright young economist who presented the BIDS seminar went on to do his PhD and did not seem to care much about Reddaway’s advice. He worked on CGE models and did well to get an IMF position.

    • Thanks Anis for that wonderful insightful information. I am a firm believer that a History of Economic Thought module should be compulsory in any economics degree. I do remember reading some of Reddaway’s work years ago. You were very fortunate indeed to have him as a lecturer. I will be reading Leijonhufvud work on Keynes thanks to Tom Hickey. Would you be able to send me some more info on 2 -variable scatter plots of time-series? Regards Wayne

      • Dear Wayne, many thanks for your compliments. Just a correction; Reddaway was not my teacher – I attended a seminar where he made that insgihtful comment which remained stuck in my mind for ever.
        On 2 variable scatter plots – I don’t have any readings if you meant that. I mentioned time-series if you are focussing on one country. Here lies the importance of economic history – knowing its political history as well as cultural-social context in which a country develops.
        You can also use cross-country 2-variable scatter plots if you are trying to make a general point or something of general in nature. However, you have to be careful about country differences.
        The gist of Reddaway’s message is to be able to tell a plausible story.

  2. I used to follow Mason but then I realized traders were showing screenshots of big bank internal research, which is much more relevant for how the economic world actually works than any of the tales academic economist go on about.

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