On DSGE and the art of using absolutely ridiculous modeling assumptions

LARS P. SYLL

Reading some of the comments — by Noah Smith, David Andolfatto and others — on my post Why Wall Street shorts economists and their DSGE models, I — as usual — get the feeling that mainstream economists when facing anomalies think that there is always some further “technical fix” that will get them out of the quagmire. But are these elaborations and amendments on something basically wrong really going to solve the problem? I doubt it. Acting like the baker’s apprentice who, having forgotten to add yeast to the dough, throws it into the oven afterwards, simply isn’t enough.

When criticizing the basic workhorse DSGE model for its inability to explain involuntary unemployment, some DSGE defenders maintain that later elaborations — e.g. newer search models — manage to do just that. I strongly disagree. One of the more conspicuous problems with those “solutions,” is that they — as e.g…

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