by There is an element of hypocrisy among DSGE advocates … Long before the advent of DSGE, microeconomic theorists demonstrated that the conditions for the derivation of aggregates from individual choices are so constraining that they cannot possibly be met in a world populated by people. Yet, never to my knowledge have DSGE advocates addressed the issue … For the DSGE advocates, the failure of an opposing approach to adhere to their a priori theoretical presuppositions are automatic grounds to reject the analysis. The first line of an early version of Christiano et al.’s apologia for DSGE runs: ‘People who don’t like dynamic stochastic general equilibrium (DSGE) models are dilettantes’ – that is, someone a truly professional macroeconomist may ignore or scorn (Christiano et
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There is an element of hypocrisy among DSGE advocates … Long before the advent of DSGE, microeconomic theorists demonstrated that the conditions for the derivation of aggregates from individual choices are so constraining that they cannot possibly be met in a world populated by people. Yet, never to my knowledge have DSGE advocates addressed the issue …
For the DSGE advocates, the failure of an opposing approach to adhere to their a priori theoretical presuppositions are automatic grounds to reject the analysis. The first line of an early version of Christiano et al.’s apologia for DSGE runs: ‘People who don’t like dynamic stochastic general equilibrium (DSGE) models are dilettantes’ – that is, someone a truly professional macroeconomist may ignore or scorn (Christiano et al., 2017, p. 2). (It is unfortunate that the editors appear to have forced the authors to remove this point from the published version. It simply obscures their actual belief that anyone opposed to DSGE models should be turned out of macroeconomics.)
‘New Keynesian’ macroeconomists have for years been arguing about the importance of the New Classical counter-revolution in economics. ‘Helping’ to change the way macroeconomics is done today — with rational expectations, Euler equations, intertemporal optimization and microfoundations — their main critique of New Classical macroeconomics is that it didn’t incorporate price stickiness into the Real Business Cycles models developed by the New Classicals. So — the ‘New Keynesians’ adopted the methodology suggested by the New Classicals and just added price stickiness!
But does putting a sticky-price DSGE lipstick on the RBC pig really help?
It sure does not!
Using arbitrary and known to be harmfully false model conventions only means that we sacrifice relevance and usefulness. Macroeconomics deserves better in the struggle for its soul.