How Accounting Accuracy Affects DSGE Models

12 Pages Posted: 29 Mar 2016 Last revised: 13 May 2016

Date Written: March 29, 2016

Abstract

This paper explores how accounting consistency affects DSGE models. As many DSGE models descended from real business cycle models, I explore a simple labor-only RBC model and then a simple capital-and-labor RBC model with an exogenous external sector introduced. The conclusion reached in this paper is that once an external sector is introduced, DSGE models may suffer from accounting inconsistency, unless disequilibrium or some non-orthodox theory of price level, real monetary supply or bonds is accepted. Then this paper explores several other cases that suffer from accounting inconsistency even without introduction of an external sector. In some of these cases, deficit spending may be a key to not falling into disequilibrium.

Keywords: accounting, model consistency, DSGE, fiscal policy, external sector

JEL Classification: B41, E13, E62, F41

Suggested Citation

Kim, Bryce, How Accounting Accuracy Affects DSGE Models (March 29, 2016). Available at SSRN: https://ssrn.com/abstract=2755967 or http://dx.doi.org/10.2139/ssrn.2755967

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