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Beyond the DSGE Straitjacket

  • Pesaran, M. Hashem

    ()

    (University of Cambridge)

  • Smith, Ron P.

    ()

    (Birkbeck College, University of London)

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 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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  1. V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2008. "New Keynesian Models: Not Yet Useful for Policy Analysis," NBER Working Papers 14313, National Bureau of Economic Research, Inc.
  2. Stephane Dees & M. Hashem Pesaran & L. Vanessa Smith & Ron P. Smith, 2008. "Identification of New Keynesian Phillips Curves from a Global Perspective," CESifo Working Paper Series 2219, CESifo Group Munich.
  3. Hashem Pesaran & Davide Pettenuzzo & Allan Timmermann, 2006. "Learning, Structural Instability and Present Value Calculations," IEPR Working Papers 06.42, Institute of Economic Policy Research (IEPR).
  4. Frank Schorfheide, 2011. "Estimation and evaluation of DSGE models: progress and challenges," Working Papers 11-7, Federal Reserve Bank of Philadelphia.
  5. Jesús Fernández-Villaverde & Juan F. Rubio-Ramírez, 2007. "How Structural Are Structural Parameters?," NBER Working Papers 13166, National Bureau of Economic Research, Inc.
  6. Chang, Yongsung & Schorfheide, Frank, 2010. "Labor-Market Heterogeneity, Aggregation, and the Lucas Critique," CEPR Discussion Papers 8039, C.E.P.R. Discussion Papers.
  7. 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.
  8. Smets, Frank & Wouters, Rafael, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," CEPR Discussion Papers 6112, C.E.P.R. Discussion Papers.
  9. Fabio Canova & Luca Sala, 2007. "Back to square one: identification issues in DSGE models," Banco de Espa�a Working Papers 0715, Banco de Espa�a.
  10. Sargent, Thomas J, 1976. "The Observational Equivalence of Natural and Unnatural Rate Theories of Macroeconomics," Journal of Political Economy, University of Chicago Press, vol. 84(3), pages 631-40, June.
  11. 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.
  12. 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.
  13. Laibson, David I. & Fuster, Andreas & Mendel, Brock, 2010. "Natural Expectations and Macroeconomic Fluctuations," Scholarly Articles 9938147, Harvard University Department of Economics.
  14. Wallis, Kenneth F, 1980. "Econometric Implications of the Rational Expectations Hypothesis," Econometrica, Econometric Society, vol. 48(1), pages 49-73, January.
  15. Pesaran, M. Hashem & Chudik, Alexander, 2014. "Aggregation in large dynamic panels," Journal of Econometrics, Elsevier, vol. 178(P2), pages 273-285.
  16. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland.
  17. 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.
  18. M. Hashem Pesaran & Alexander Chudik, 2010. "Econometric Analysis of High Dimensional VARs Featuring a Dominant Unit," CESifo Working Paper Series 3055, CESifo Group Munich.
  19. 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.
  20. Charles F. Manski, 2010. "Policy Analysis with Incredible Certitude," NBER Working Papers 16207, National Bureau of Economic Research, Inc.
  21. Pesaran, M. H. & Smith, R. P., 1985. "Evaluation of macroeconometric models," Economic Modelling, Elsevier, vol. 2(2), pages 125-134, April.
  22. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09.
  23. Pesaran, M. Hashem & Smith, Ron, 1995. "The role of theory in econometrics," Journal of Econometrics, Elsevier, vol. 67(1), pages 61-79, May.
  24. 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).
  25. Pesaran, M. H., 1981. "Identification of rational expectations models," Journal of Econometrics, Elsevier, vol. 16(3), pages 375-398, August.
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