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Beyond the DSGE Straitjacket

  • Hashem M. Pesaran
  • Ron P. Smith

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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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3447.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3447
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  1. Thomas J. Sargent, 1975. "The observational equivalence of natural and unnatural rate theories of macroeconomics," Working Papers 48, Federal Reserve Bank of Minneapolis.
  2. Canova, Fabio & Sala, Luca, 2009. "Back to square one: Identification issues in DSGE models," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 431-449, May.
  3. Ellen R. McGrattan & Patrick J. Kehoe & V. V. Chari, 2008. "New Keynesian models: not yet useful for policy analysis," Working Papers 664, Federal Reserve Bank of Minneapolis.
  4. Pesaran, M.H. & Chudik, A., 2010. "Econometric Analysis of High Dimensional VARs Featuring a Dominant Unit," Cambridge Working Papers in Economics 1024, Faculty of Economics, University of Cambridge.
  5. Laibson, David I. & Fuster, Andreas & Mendel, Brock, 2010. "Natural Expectations and Macroeconomic Fluctuations," Scholarly Articles 9938147, Harvard University Department of Economics.
  6. Dees, S. & Pesaran, M.H. & Smith, L.V. & Smith, R.P., 2008. "Identification of New Keynesian Phillips Curves from a Global Perspective," Cambridge Working Papers in Economics 0803, Faculty of Economics, University of Cambridge.
  7. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
  8. 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.
  9. Stephane Dees & Filippo di Mauro & M. Hashem Pesaran & L. Vanessa Smith, 2006. "Exploring the International Linkages of the Euro Area: a Global VAR Analysis," Computing in Economics and Finance 2006 47, Society for Computational Economics.
  10. Lars Peter Hansen & James J. Heckman, 1996. "The Empirical Foundations of Calibration," Journal of Economic Perspectives, American Economic Association, vol. 10(1), pages 87-104, Winter.
  11. Jesús Fernández-Villaverde & Juan F Rubio-Ramírez, 2007. "How Structural Are Structural Parameters?," Levine's Bibliography 843644000000000057, UCLA Department of Economics.
  12. Charles F. Manski, 2011. "Policy Analysis with Incredible Certitude," Economic Journal, Royal Economic Society, vol. 121(554), pages F261-F289, 08.
  13. Pesaran, Mohammad Hashem & Pettenuzzo, Davide & Timmermann, Allan, 2006. "Learning, structural instability and present value calculations," Discussion Paper Series 1: Economic Studies 2006,27, Deutsche Bundesbank, Research Centre.
  14. Pesaran, M. Hashem & Chudik, Alexander, 2011. "Aggregation in Large Dynamic Panels," IZA Discussion Papers 5478, Institute for the Study of Labor (IZA).
  15. 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).
  16. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.
  17. Pesaran, M. Hashem & Smith, Ron, 1995. "The role of theory in econometrics," Journal of Econometrics, Elsevier, vol. 67(1), pages 61-79, May.
  18. Frank Smets & Raf Wouters, 2007. "Shocks and Frictions in US Business Cycles : a Bayesian DSGE Approach," Working Paper Research 109, National Bank of Belgium.
  19. Pesaran, M. H., 1981. "Identification of rational expectations models," Journal of Econometrics, Elsevier, vol. 16(3), pages 375-398, August.
  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 1239, European Central Bank.
  21. Pesaran, M. H. & Smith, R. P., 1985. "Evaluation of macroeconometric models," Economic Modelling, Elsevier, vol. 2(2), pages 125-134, April.
  22. Wallis, Kenneth F, 1980. "Econometric Implications of the Rational Expectations Hypothesis," Econometrica, Econometric Society, vol. 48(1), pages 49-73, January.
  23. Frank Schorfheide, 2011. "Estimation and Evaluation of DSGE Models: Progress and Challenges," NBER Working Papers 16781, National Bureau of Economic Research, Inc.
  24. 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, vol. 40(8), pages 1599-1623, December.
  25. Cogley Timothy & Yagihashi Takeshi, 2010. "Are DSGE Approximating Models Invariant to Shifts in Policy?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-33, October.
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