Thursday, September 11, 2014
Why Do We Need DSGE Models?
Olivier Blanchard helped to develop the macroeconomic models that are routinely used by central banks. Those models failed to forecast the Great Recession and Blanchard made an effort to explain why they failed. Brad DeLong does not buy Blanchard's explanation. He explains why he is not sold on DSGE models, and their role macroeconomic policy setting in this article. We have had policy failures during the Great Recession and in its aftermath. He suggests some of the ways in which we need to think differently about the macro economy.