Further Thoughts on DSGE Models by Olivier Blanchard published by PIIE (10/2013)
“What we agree on and what we do not
A number of economists have recently written about the pros and cons of dynamic stochastic general equilibrium models (DSGEs). (Among them, and in addition to my own piece, are Narayana Kocherlakota, Simon Wren-Lewis, Paul Romer, Steve Keen, Anton Korinek, Paul Krugman, Noah Smith, Roger Farmer, and Brad Delong.)
Here are my reactions to the debate:
I believe that there is wide agreement on the following three propositions; let us not discuss them further, and move on:
- Macroeconomics is about general equilibrium.
2. Different types of general equilibrium models are needed for different purposes. For exploration and pedagogy, the criterion should be transparency and simplicity, and for that, toy models are the right vehicles. For forecasting, the criterion should be forecasting accuracy, and purely statistical models may, for the time being, be best. For conditional forecasting, i.e. to look for example at the effects of changes in policy, more structural models are needed, but they must fit the data closely and do not need to be religious about micro foundations.
3. Partial equilibrium modelling and estimation are essential to understanding the particular mechanisms of relevance to macroeconomics. Only when they are well understood does it become essential to understand their general equilibrium effects. Not every macroeconomist should be working on general equilibrium models (there is such a thing as division of labor)…
