The scientific foundation of dynamic stochastic general equilibrium (DSGE) models
AbstractDSGE-models provide a coherent framework of analysis. This coherence is brought about by restricting acceptable behavior of agents to dynamic utility maximization and rational expectations. The problem of the DSGE-models (and more generally of macroeconomic models based on rational expectations) is that they assume extraordinary cognitive capabilities of individual agents. In addition, these models need a lot of ad-hoc assumptions to make them fit the data. I argue that we need models that take into account the limited cognitive abilities of agents. One can introduce rationality in such models by assuming “trial and error“ learning. I propose such a model and I analyze its implications.
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Bibliographic InfoPaper provided by Katholieke Universiteit Leuven in its series Open Access publications from Katholieke Universiteit Leuven with number urn:hdl:123456789/288327.
Date of creation: 2010
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Publication status: Published in Public Choice (2010) v.144, p.413-443
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