Beyond the DSGE Straitjacket
M. Hashem Pesaran
University of Southern California; Cambridge University - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Institute for the Study of Labor (IZA)
May 17, 2011
CESifo Working Paper Series No. 3447
Academic macroeconomics and the research department of central banks have come to be dominated by Dynamic, Stochastic, General Equilibrium (DSGE) models based on micro-foundations of optimising representative agents with rational expectations. We argue that the dominance of this particular sort of DSGE and the resistance of some in the profession to alternatives has become a straitjacket that restricts empirical and theoretical experimentation and inhibits innovation and that the profession should embrace a more flexible approach to macroeconometric modelling. We describe one possible approach.
Number of Pages in PDF File: 16
Keywords: macroeconometric models, DSGE, VARs, long run theory
JEL Classification: C100, E100working papers series
Date posted: May 17, 2011
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