scholarly journals Cordon of Conformity: Why DSGE models Are Not the Future of Macroeconomics

2021 ◽  
pp. 1-24
Author(s):  
Servaas Storm
Keyword(s):  
Policy Analysis ◽  
Multiple Equilibria ◽  
Macroeconomic Policy ◽  
Multiple Equilibrium ◽  
Dsge Models ◽  
Two Dimensional ◽  
Dsge Model ◽  
Macroeconomic Theory ◽  
Macroeconomic Analysis ◽  
Theory Project

The Rebuilding Macroeconomic Theory Project, led by David Vines and Samuel Wills (2020), is an important, albeit long overdue, initiative to rethink a failing mainstream macroeconomics. Professors Vines and Wills, who must be congratulated for stepping up to the challenge of trying to make mainstream macroeconomics relevant again, call for a new multiple-equilibrium and diverse (MEADE) paradigm for macroeconomics. Their idea is to start with simple models, ideally two-dimensional sketches, that explain mechanisms that can cause multiple equilibria. These mechanisms should then be incorporated into larger DSGE models in a new, multiple-equilibrium synthesis – to see how the fundamental pieces of the economy fit together, subject to it being ‘properly micro-founded’. This paper argues that the MEADE paradigm is bound to fail, because it maintains the DSGE model as the unifying framework at the center of macroeconomic analysis. The paper reviews 10 fundamental weaknesses inherent in DSGE models which make these models irreparably useless for macroeconomic policy analysis. Mainstream macroeconomics must put DSGE models, once and for all, in the Museum of Implausible Economic Models – and learn important lessons from non-DSGE macroeconomic approaches.

scholarly journals Monetary Policy Analysis with Potentially Misspecified Models

2009 ◽  
Vol 99 (4) ◽  
pp. 1415-1450 ◽  
Author(s):  
Marco Del Negro ◽  
Frank Schorfheide
Keyword(s):  
Policy Analysis ◽  
Recent Literature ◽  
Model Misspecification ◽  
Dynamic Stochastic General Equilibrium ◽  
Dsge Models ◽  
Estimation Of Parameters ◽  
Dsge Model ◽  
Misspecified Models ◽  
Trade Offs ◽  
Dynamic Stochastic

Policy analysis with potentially misspecified dynamic stochastic general equilibrium (DSGE) models faces two challenges: estimation of parameters that are relevant for policy trade-offs, and treatment of the deviations from the cross-equation restrictions. Using post-1982 US data, we study the robustness of the policy prescriptions from a state-of-the-art DSGE model with respect to two approaches to model misspecification pursued in the recent literature: (i) adding shocks to the DSGE model and/or generalizing the processes followed by these shocks; and (ii) explicit modeling of deviations from cross-equation restrictions (DSGE-VAR). (JEL C51, E13, E43, E52, E58)

Implications for Regional Science of the “Rebuilding Macroeconomic Theory Project”

2021 ◽  
pp. 016001762098659
Author(s):  
Kieran P. Donaghy
Keyword(s):  
Monetary Policy ◽  
Graduate Students ◽  
Global Financial Crisis ◽  
Financial Frictions ◽  
Regional Science ◽  
Macroeconomic Theory ◽  
Income Groups ◽  
Big Picture ◽  
Theory Project ◽  
The Global Financial Crisis

The inability of macroeconomists to anticipate the Global Financial Crisis or reproduce it in their models has led to an important stock-taking of deficiencies in, and necessary modifications to, theories and models used pervasively by researchers and taught to graduate students. This stock-taking—the so-called “Rebuilding Macroeconomic Theory Project,” organized by David Vines and Samuel Wills—has provided an opportunity for economy-wide modelers (who include regional scientists) to consider whether the theories and models they employ are adequate and appropriate to the tasks to which they put them. In this paper I provide a brief report on the project, retrace the development of macroeconomics, and summarize responses by prominent macroeconomists to a set of questions posed by organizers of the project, while drawing implications of these questions and responses for regional science. I then offer original suggestions from a regional scientist’s perspective on what is missing from the “benchmark” macro-model, how financial frictions can be introduced, how behavioral foundations might be modified, how heterogeneity of agents might be captured, and what new stylized facts need to be explained. I proceed to illustrate how several of the suggested changes can be integrated in economy-wide models by drawing on a study of the impacts of monetary policy on consumption by different income groups in Indonesia. I close the paper by posing a number of “big-picture questions” on the implications of the RMTP for economy-wide modelers and regional scientists to ponder and by offering a brief reflection and aspiration.

Metropolis-Hastings Algorithms for DSGE Models

2015 ◽  
Author(s):  
Edward P. Herbst ◽  
Frank Schorfheide
Keyword(s):  
Random Walk ◽  
Posterior Distribution ◽  
Prior Distribution ◽  
Large Scale ◽  
Likelihood Function ◽  
Dsge Models ◽  
Posterior Distributions ◽  
Dsge Model ◽  
Alternative Proposal ◽  
Posterior Moments

This chapter talks about the most widely used method to generate draws from posterior distributions of a DSGE model: the random walk MH (RWMH) algorithm. The DSGE model likelihood function in combination with the prior distribution leads to a posterior distribution that has a fairly regular elliptical shape. In turn, the draws from a simple RWMH algorithm can be used to obtain an accurate numerical approximation of posterior moments. However, in many other applications, particularly those involving medium- and large-scale DSGE models, the posterior distributions could be very non-elliptical. Irregularly shaped posterior distributions are often caused by identification problems or misspecification. In lieu of the difficulties caused by irregularly shaped posterior surfaces, the chapter reviews various alternative MH samplers, which use alternative proposal distributions.

Modelling Monetary Policy

2021 ◽  
pp. 293-316
Author(s):  
Juan Antonio Morales ◽  
Paul Reding
Keyword(s):  
Monetary Policy ◽  
Policy Analysis ◽  
Policy Decision ◽  
Central Banks ◽  
Dynamic Stochastic General Equilibrium ◽  
Dsge Models ◽  
Dynamic Stochastic ◽  
Policy Decision Making

This last chapter deals with the toolbox that central banks use to design and implement their monetary policy strategy. Central banks develop various types of model, both for forecasting and for policy analysis. The chapter discusses the main characteristics of the models used, their strengths and limitations. It assesses how dynamic stochastic general equilibrium (DSGE) models are used for monetary policy analysis. Examples are provided on how they contribute to explore fundamental, long-term policy issues specific to LFDCs. The chapter also discusses the contribution of small semi-structural models which, though less strongly theory grounded than DSGE models, can be brought closer to the available data and are therefore possibly better suited to the context of LFDCs. Attention is also drawn to the key role of judgement as the indispensable complement, in monetary policy decision-making, to model-based policy analysis.

Exogenous Shocks and Macroeconomic Policy Analysis using Applied Macro-Econometric Models in Africa

2016 ◽  
pp. 74-129
Author(s):  
Alemayehu Geda ◽  
Fredrik Huizinga ◽  
Addis Yimer
Keyword(s):  
Policy Analysis ◽  
Econometric Model ◽  
Macroeconomic Policy ◽  
Econometric Models ◽  
Policy Makers ◽  
Exogenous Shocks ◽  
The Core ◽  
Fiscal Balance ◽  
Ministry Of Finance ◽  
Empirical Framework

In this study we have developed a macro-econometric model for a typical supply constrained African economy. This is aimed at developing a theoretical and empirical template for such policy tools which are increasingly demanded in Africa. We have concretized it by building a macro-econometric model for Rwanda. The Rwanda macro-econometric model has 107 equations of which 72 are endogenous. In addition, a supplementary ARIMA based model with 33 equations for exogenous variable is built to make the model useful for forecasting. The fiscal, balance of payment and money supply block of the model is fairly disaggregated to offer an adequate picture of the macro economy. An econometric estimation of the core behavioral equations of the model using equilibrium [error]-correction approach is made with the database that stretches from 1960 to 2009. The model is similar to successful macro models in the region such as that of the KIPPRA-Treasury model of Kenya. It can also easily be further extended to the support budgeting, forecasting and macroeconomic policy analysis work at the relevant ministries in Africa such as the Ministry of Finance in Rwanda. We have managed to successfully solve the model from 1999 to 2009 and forecast major macro outcomes from 2010 to 2014. We have also used it to conduct a policy simulation exercise which is very important for policy makers such as those in Rwanda. We hope this model offers a theoretical and empirical framework for building macro model across Africa which is increasingly being demanded in many countries.

scholarly journals Stochastic marine ice sheet variability

2018 ◽  
Vol 843 ◽  
pp. 748-777 ◽  
Author(s):  
T. E. Mulder ◽  
S. Baars ◽  
F. W. Wubs ◽  
H. A. Dijkstra
Keyword(s):  
Transition Probabilities ◽  
Accumulation Rate ◽  
Ice Sheets ◽  
Ice Sheet ◽  
Field Measurements ◽  
Multiple Equilibrium ◽  
Short Time Scale ◽  
Two Dimensional ◽  
Grounding Line ◽  
Short Time

It is well known that deterministic two-dimensional marine ice sheets can only be stable if the grounding line is positioned at a sufficiently steep, downward sloping bedrock. When bedrock conditions favour instabilities, multiple stable ice sheet profiles may occur. Here, we employ continuation techniques to examine the sensitivity of a two-dimensional marine ice sheet to stochastic noise representing short time scale variability, either in the accumulation rate or in the sea level height. We find that in unique regimes, the position of the grounding line is most sensitive to noise in the accumulation rate and can explain excursions observed in field measurements. In the multiple equilibrium regime, there is a strong asymmetry in transition probabilities between the different ice sheet states, with a strong preference to switch to the branch with a steeper bedrock slope.

Macroeconomic Policy Frameworks for Resource-Rich Developing Countries--Analytic Frameworks and Applications

Policy Papers ◽  
2012 ◽  
Vol 2012 (71) ◽  
Author(s):  
Keyword(s):  
Developing Countries ◽  
Policy Analysis ◽  
Absorptive Capacity ◽  
Scale Up ◽  
Macroeconomic Policy ◽  
Capacity Constraints ◽  
Policy Frameworks ◽  
External Sustainability ◽  
Analytical Frameworks ◽  
Fiscal Frameworks

This supplement presents the analytical frameworks underlying the IMF’s staff’s enhanced policy analysis and advice to resource-rich developing countries (RRDCs). The proposed macro-fiscal models, which are applied to selected country or regional cases, are aimed at addressing questions regarding how to deal with resource revenue uncertainty and how to scale up spending within relevant frameworks that ensure fiscal and external sustainability while addressing absorptive capacity constraints. The country applications confirm the importance attached by both IMF staff and country authorities of using the appropriate macro-fiscal frameworks to address the specific challenges faced by RRDCs.

scholarly journals Multiple Equilibria and Hysteresis of Two Unequal-Transport Western Boundary Currents Colliding at a Gap

2014 ◽  
Vol 44 (7) ◽  
pp. 1873-1885 ◽  
Author(s):  
Zheng Wang ◽  
Dongliang Yuan
Keyword(s):  
Multiple Equilibria ◽  
Current System ◽  
Ocean Model ◽  
Multiple Equilibrium ◽  
Western Boundary ◽  
Western Basin ◽  
Western Boundary Currents ◽  
Boundary Currents ◽  
Surface Drifters ◽  
Eddy Shedding

Abstract The nonlinear collision of two western boundary currents (WBCs) of Munk thickness LM colliding near a gap of width 2a is studied using a 1.5-layer, reduced-gravity, quasigeostrophic ocean model. The work is a continuation of our recent study on nonlinear collision of two equal-strength WBCs at a wide gap. It is found that, for narrow gaps, a < 5.7LM, and both of the WBCs fail to penetrate into the western basin due to the restriction of friction; for intermediate size gaps, 5.7LM ≤ a < 9.6LM, and multiple equilibrium states exist for the colliding WBCs: the penetrating state, the choking state, and the eddy-shedding state. The current system transits between them through a hysteresis procedure, with transitions at different Reynolds numbers from those in the equal-transport case. The stronger WBC tends to intrude more deeply into the western basin than the weaker WBC; for wide gaps, a > 9.6LM, and only penetrating and eddy-shedding states exist. No choking state is identified for either WBC. It is found that the critical gap width for the disappearance of the choking state decreases with the asymmetry of the WBC system. The theory is used to explain some of the circulation features at the entrance of the Indonesian Throughflow in the western Pacific Ocean recently observed with satellite-tracked surface drifters.

Sign in / Sign up

Export Citation Format

Share Document