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Beyond the DSGE straightjacket

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  • Pesaran, M. H.
  • Smith, R. P.

Abstract

Academic macroeconomics and the research department of central banks have come to be dominated by Dynamic, Stochastic, General Equilibrium (DSGE) models based on micro-foundations of optimising representative agents with rational expectations. We argue that the dominance of this particular sort of DSGE and the resistance of some in the profession to alternatives has become a straitjacket that restricts empirical and theoretical experimentation and inhibits innovation and that the profession should embrace a more flexible approach to macroeconometric modelling. We describe one possible approach.

Suggested Citation

  • Pesaran, M. H. & Smith, R. P., 2011. "Beyond the DSGE straightjacket," Cambridge Working Papers in Economics 1138, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:1138
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    References listed on IDEAS

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    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models

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