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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)

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.

Suggested Citation

  • Jon Faust, 2012. "DSGE Models: I Smell a Rat (and It Smells Good)," International Journal of Central Banking, International Journal of Central Banking, vol. 8(1), pages 53-64, March.
  • Handle: RePEc:ijc:ijcjou:y:2012:q:1:a:3
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    References listed on IDEAS

    as
    1. Faust, Jon & Gupta, Abhishek, 2010. "Posterior Predictive Analysis for Evaluating DSGE Models," MPRA Paper 26721, University Library of Munich, Germany.
    2. Gupta, Abhishek, 2010. "A Forecasting Metric for Evaluating DSGE Models for Policy Analysis," MPRA Paper 26718, University Library of Munich, Germany.
    3. Hansen, Bruce E., 2005. "Challenges For Econometric Model Selection," Econometric Theory, Cambridge University Press, vol. 21(01), pages 60-68, February.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Giacomini, Raffaella, 2014. "Economic theory and forecasting: lessons from the literature," CEPR Discussion Papers 10201, C.E.P.R. Discussion Papers.
    2. Andrei Polbin & Sergey Drobyshevsky, 2014. "Developing a Dynamic Stochastic Model of General Equilibrium for the Russian Economy," Research Paper Series, Gaidar Institute for Economic Policy, issue 166P, pages 156-156.
    3. Martin Slanicay & Jan Čapek & Miroslav Hloušek, 2016. "Some Notes On Problematic Issues In Dsge Models," Economic Annals, Faculty of Economics, University of Belgrade, vol. 61(210), pages 79-100, July - Se.
    4. 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).
    5. Chauvet, Marcelle & Potter, Simon, 2013. "Forecasting Output," Handbook of Economic Forecasting, Elsevier.
    6. Sebastian Dullien, 2012. "Is new always better than old? On the treatment of fiscal policy in Keynesian models," Review of Keynesian Economics, Edward Elgar Publishing, vol. 1(0), pages 5-23.
    7. Chatterjee, Sidharta, 2014. "Equilibrium Models of Macroeconomic Science: What to Look For in (DSGE) Models?," MPRA Paper 53893, University Library of Munich, Germany.
    8. Raffaella Giacomini, 2014. "Economic theory and forecasting: lessons from the literature," CeMMAP working papers CWP41/14, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    9. repec:eee:ecmode:v:68:y:2018:i:c:p:484-505 is not listed on IDEAS

    More about this item

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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