Monday, April 1, 2013

DSGE Despair

Macroeconomics is essentially about the use of DSGE models to predict the effect of policy changes on the economy.  The models are not very good at prediction, but that seems to have little impact on their use.  They are used by many central banks, and every aspiring graduate student has to become familiar with DSGE models.  They are a badge of the profession.

This article provides a good explanation of the problems with DSGE models and it explains why they are not very good at prediction.  The author was a physics major who just received his PhD from Michigan in macroeconomics.  His views on DSGE models probably encouraged him to take a job teaching financial economics rather than pursuing a career in macroeconomics. 

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