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March 2012 issue
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Coletti, Devereux, Levin, Walsh, Williams
Lama, Medina
Faust
Glocker, Towbin
Bordo, Humpage, Schwartz
King
Ferrucci, Jiménez-Rodriguez, Onorante
Lipínska, Millard
Hamilton
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DSGE Models: I Smell a Rat (and It Smells Good)

by Jon Faust
Johns Hopkins University and NBER

Abstract

DSGE models have now reached a point where they can and do serve an important role in the monetary policy process. From the standpoint of real-world policymaking, however, there remain important areas of omission and coarse approximation in these models. I argue that macroeconomics should follow other fields such as toxicology in having a formal literature on how best to use models that are far from perfect as a basis for public policy.

JEL Codes: E2, E3, E6.

 
Full article (PDF, 12 pages 160 kb)