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DSGE Models: I Smell a Rat (and It Smells Good)

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  • Jon Faust

    (Johns Hopkins University and NBER)

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    Abstract

    DSGE models have now reached a point where they can and do serve an important role in the monetary policy process. From the standpoint of real-world policymaking, however, there remain important areas of omission and coarse approximation in these models. I argue that macroeconomics should follow other fields such as toxicology in having a formal literature on how best to use models that are far from perfect as a basis for public policy.

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    Bibliographic Info

    Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

    Volume (Year): 8 (2012)
    Issue (Month): 1 (March)
    Pages: 53-64

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    Handle: RePEc:ijc:ijcjou:y:2012:q:1:a:3

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    1. Gupta, Abhishek, 2010. "A Forecasting Metric for Evaluating DSGE Models for Policy Analysis," MPRA Paper 26718, University Library of Munich, Germany.
    2. Jon Faust & Abhishek Gupta, 2012. "Posterior Predictive Analysis for Evaluating DSGE Models," NBER Working Papers 17906, National Bureau of Economic Research, Inc.
    3. Hansen, Bruce E., 2005. "Challenges For Econometric Model Selection," Econometric Theory, Cambridge University Press, vol. 21(01), pages 60-68, February.
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    Cited by:
    1. Chatterjee, Sidharta, 2014. "Equilibrium Models of Macroeconomic Science: What to Look For in (DSGE) Models?," MPRA Paper 53893, University Library of Munich, Germany.
    2. Spahn, Peter, 2013. "Subprime and euro crisis: Should we blame the economists?," FZID Discussion Papers 83-2013, University of Hohenheim, Center for Research on Innovation and Services (FZID).
    3. Sebastian Dullien, 2012. "Is new always better than old? On the treatment of fiscal policy in Keynesian models," Review of Keynesian Economics, Edward Elgar, vol. 1(0), pages 5-23.

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