Thoughts on DSGE Macroeconomics: Matching the Moment, But Missing the Point?

Abstract

This article critically evaluates the benefits and costs of the dominant methodology in macroeconomics, the DSGE approach. Although the approach has led to great progress in some areas, I argue that its conceptual restrictions, numerical methods, and the resulting complexity have created biases that risk holding back progress in macroeconomics. There is great scope for making renewed progress by judiciously pushing the boundaries of some of these methodological restrictions. A richer set of methodologies would also make macroeconomics more robust and better prepared for new challenges in understanding and governing our economies.

Keywords: DSGE models

JEL Classification: A23, B22, E0