March 2012 issue contents
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.

Full article (PDF, 12 pages 160 kb)