The “DSGE fetish”

The papers´title is “Inflation in the Great Recession and New Keynesian Models“, but inflation should not be the main concern:

Several prominent economists have argued that existing DSGE models cannot properly account for the evolution of key macroeconomic variables during and following the recent Great Recession. We challenge this argument by showing that a standard DSGE model with financial frictions available prior to the recent crisis successfully predicts a sharp contraction in economic activity along with a protracted but relatively modest decline in inflation, following the rise in financial stress in 2008:IV. The model does so even though inflation remains very dependent on the evolution of economic activity and of monetary policy.

Authors:

Del Negro, Marco (Federal Reserve Bank of New York)
Giannoni, Marc P. (Federal Reserve Bank of New York)
Schorfheide, Frank (U PA)

So I ask: “Were they sleeping at the wheel?”

One thought on “The “DSGE fetish”

  1. Modelers ever say if they add enough complexity, fragility, doo-dads and wrinkles on to their models, they will accurately capture economic growth and also prove pre-existing biases.

    However, I suspect if an economic model can be developed that is accurate and has predictive power, then Wall Street would do so, and it has not yet.

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