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Beyond the DSGE Straitjacket

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  • Pesaran, M. Hashem

    ()
    (University of Cambridge)

  • Smith, Ron P.

    ()
    (Birkbeck College, University of London)

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.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5661.

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Length: 17 pages
Date of creation: Apr 2011
Date of revision:
Handle: RePEc:iza:izadps:dp5661

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Keywords: macroeconometric models; DSGE; VARs; long run theory;

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References

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  1. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, MIT Press, vol. 1(5), pages 1123-1175, 09.
  2. Dées, Stéphane & Pesaran, Hashem & Smith, Vanessa & Smith, Ron P., 2008. "Identification of new Keynesian Phillips Curves from a global perspective," Working Paper Series, European Central Bank 0892, European Central Bank.
  3. Yongsung Chang & Sun-Bin Kim & Frank Schorfheide, 2010. "Labor-Market Heterogeneity, Aggregation, and the Lucas Critique," NBER Working Papers 16401, National Bureau of Economic Research, Inc.
  4. Hashem M. Pesaran & Alexander Chudik, 2011. "Aggregation in Large Dynamic Panels," CESifo Working Paper Series 3346, CESifo Group Munich.
  5. Ellen R. McGrattan & Patrick J. Kehoe & V. V. Chari, 2008. "New Keynesian models: not yet useful for policy analysis," Working Papers, Federal Reserve Bank of Minneapolis 664, Federal Reserve Bank of Minneapolis.
  6. Fabio Canova & Luca Sala, 2005. "Back to square one: Identification issues in DSGE models," Economics Working Papers 927, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 2006.
  7. Hashem Pesaran & Davide Pettenuzzo & Allan Timmermann, 2007. "Learning, Structural Instability, and Present Value Calculations," Econometric Reviews, Taylor & Francis Journals, Taylor & Francis Journals, vol. 26(2-4), pages 253-288.
  8. Charles Manski, 2011. "Policy analysis with incredible certitude," CeMMAP working papers, Centre for Microdata Methods and Practice, Institute for Fiscal Studies CWP04/11, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  9. Dees, S. & di Mauro, F. & Pesaran, M.H. & Smith, L.V., 2005. "Exploring the International Linkages of the Euro Area: a Global VAR Analysis," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0518, Faculty of Economics, University of Cambridge.
  10. Pesaran, M.H. & Chudik, A., 2010. "Econometric Analysis of High Dimensional VARs Featuring a Dominant Unit," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 1024, Faculty of Economics, University of Cambridge.
  11. Thomas J. Sargent, 1975. "The observational equivalence of natural and unnatural rate theories of macroeconomics," Working Papers, Federal Reserve Bank of Minneapolis 48, Federal Reserve Bank of Minneapolis.
  12. Jesús Fernández-Villaverde & Juan F. Rubio-Ramírez, 2008. "How Structural Are Structural Parameters?," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 83-137 National Bureau of Economic Research, Inc.
  13. Koop, Gary & Pesaran, M. Hashem & Smith, Ron P., 2011. "On Identification of Bayesian DSGE Models," IZA Discussion Papers 5638, Institute for the Study of Labor (IZA).
  14. Laibson, David I. & Fuster, Andreas & Mendel, Brock, 2010. "Natural Expectations and Macroeconomic Fluctuations," Scholarly Articles 9938147, Harvard University Department of Economics.
  15. Lars Peter Hansen & James J. Heckman, 1996. "The Empirical Foundations of Calibration," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 10(1), pages 87-104, Winter.
  16. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Jun.
  17. Pesaran, M. Hashem & Smith, Ron, 1995. "The role of theory in econometrics," Journal of Econometrics, Elsevier, Elsevier, vol. 67(1), pages 61-79, May.
  18. Frank Schorfheide, 2011. "Estimation and Evaluation of DSGE Models: Progress and Challenges," NBER Working Papers 16781, National Bureau of Economic Research, Inc.
  19. Wallis, Kenneth F, 1980. "Econometric Implications of the Rational Expectations Hypothesis," Econometrica, Econometric Society, Econometric Society, vol. 48(1), pages 49-73, January.
  20. Dées, Stéphane & Pesaran, Hashem & Smith, Vanessa & Smith, Ron P., 2010. "Supply, demand and monetary policy shocks in a multi-country New Keynesian Model," Working Paper Series, European Central Bank 1239, European Central Bank.
  21. Timothy Cogley & Riccardo Colacito & Lars Peter Hansen & Thomas J. Sargent, 2008. "Robustness and U.S. Monetary Policy Experimentation," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 40(8), pages 1599-1623, December.
  22. Pesaran, M. H., 1981. "Identification of rational expectations models," Journal of Econometrics, Elsevier, Elsevier, vol. 16(3), pages 375-398, August.
  23. Smets, Frank & Wouters, Raf, 2007. "Shocks and frictions in US business cycles: a Bayesian DSGE approach," Working Paper Series, European Central Bank 0722, European Central Bank.
  24. Cogley Timothy & Yagihashi Takeshi, 2010. "Are DSGE Approximating Models Invariant to Shifts in Policy?," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 10(1), pages 1-33, October.
  25. Pesaran, M. H. & Smith, R. P., 1985. "Evaluation of macroeconometric models," Economic Modelling, Elsevier, Elsevier, vol. 2(2), pages 125-134, April.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. What is a macroeconomic model?
    by Economic Logician in Economic Logic on 2011-05-30 14:37:00
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Cited by:
  1. Balfoussia, Hiona & Brissimis, Sophocles & Delis, Manthos D, 2011. "The theoretical framework of monetary policy revisited," MPRA Paper 32236, University Library of Munich, Germany.
  2. Barrera, Carlos, 2013. "El sistema de predicción desagregada: Una evaluación de las proyecciones de inflación 2006-2011," Working Papers, Banco Central de Reserva del Perú 2013-009, Banco Central de Reserva del Perú.

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