Working Paper: NBER ID: w24811
Authors: Lawrence J. Christiano; Martin S. Eichenbaum; Mathias Trabandt
Abstract: The outcome of any important macroeconomic policy change is the net effect of forces operating on different parts of the economy. A central challenge facing policy makers is how to assess the relative strength of those forces. Dynamic Stochastic General Equilibrium (DSGE) models are the leading framework that macroeconomists have for dealing with this challenge in an open and transparent manner. This paper reviews the state of DSGE models before the financial crisis and how DSGE modelers responded to the crisis and its aftermath. In addition, we discuss the role of DSGE models in the policy process.
Keywords: Dynamic Stochastic General Equilibrium; Macroeconomic Policy; Financial Crisis
JEL Codes: E0; E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| model assumptions (C51) | inability to foresee economic downturns (E32) |
| historical episodes (N10) | impact of policy changes (F68) |
| microeconomic data (C81) | break observational equivalence among different DSGE models (E13) |
| Bayesian methods (C11) | identify causal relationships (C32) |
| financial frictions (G19) | enhance predictive power of DSGE models (E13) |
| risk shocks (D81) | GDP fluctuations (F44) |
| economic conditions (E66) | systemic risks (F65) |
| DSGE models (E13) | understanding net effects of macroeconomic policy changes (E65) |
| transparency of DSGE models (E13) | improved model development (C52) |
| model limitations (C51) | inability to foresee economic vulnerabilities (F65) |