Paradise lost? A brief history of DSGE macroeconomics

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Title: Paradise lost? A brief history of DSGE macroeconomics
Author: Gulan, Adam
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
Series number: 22/2018
Year of publication: 2018
Publication date: 7.11.2018
Pages: 34
Subject (yso): taloudelliset mallit; ekonometriset mallit; makrotaloustiede; rahoitusmarkkinat; kriisit; taloudelliset kriisit
Keywords: mallit; DSGE
JEL: B22; E13
Other keywords: macroeconometric models; DSGE; Lucas critique; financial crisis
Abstract: Since the Global Financial Crisis, academic economists and policymakers have had to deal with uncomfortable questions about the quality of their models and the state of macroeconomics as a profession. This note offers a summary of this discussion, focusing on the Dynamic Stochastic General Equilibrium (DSGE) framework and its underpinnings. This class of models reflects both theoretical advances and perennial modeling challenges. While DSGE modeling developed in times of scarce micro data and limited computational resources, it has much room for improvement given progress along these dimensions and advances in other branches of economics. Key tasks on the to-do-list for model improvement include the modeling on the financial sector, departures from the representative agent and rationality, as well as clarification of the empirical relevance of the Lucas critique. The framework is likely to remain a major research and policy tool, although its limitations call for greater robustness, validation and open recognition of uncertainty in drawing real-life quantitative conclusions.

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