DSGE Models: I Smell a Rat (and It Smells Good)
by Jon Faust
Johns Hopkins University and NBER
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.
(PDF, 12 pages 160 kb)