by Summary:
Although this sounds extremely harsh, it is the only way to describe aspects of DSGE macro such as the assumption that the level of interest rates is a key determinant of economic behaviour. In practice, this assumption is built into all mainstream models, and the empirical methodologies have no way of rejecting the assumption. It is not entirely an accident that the consensus has been shocked by the slow pace of recovery after modern recessions -- after all, it was believed that the level of interest rates was "unsustainably low." Indeed, the natural rate of interest had to be revised lower in order for the data to fit the theory. In other words, the whole panoply of mathematics used is a gigantic red herring.From the perspective of wanting to understand how the economy functions,
Topics:
Mike Norman considers the following as important: assumptions, DSGE, DSGE modeling, economics profession, ideology, Lars Ljungqvist, optimal control theory, Recursive Macroeconomic Theory, Thomas J. Sargent
This could be interesting, too:
Although this sounds extremely harsh, it is the only way to describe aspects of DSGE macro such as the assumption that the level of interest rates is a key determinant of economic behaviour. In practice, this assumption is built into all mainstream models, and the empirical methodologies have no way of rejecting the assumption. It is not entirely an accident that the consensus has been shocked by the slow pace of recovery after modern recessions -- after all, it was believed that the level of interest rates was "unsustainably low." Indeed, the natural rate of interest had to be revised lower in order for the data to fit the theory. In other words, the whole panoply of mathematics used is a gigantic red herring.From the perspective of wanting to understand how the economy functions,
Topics:
Mike Norman considers the following as important: assumptions, DSGE, DSGE modeling, economics profession, ideology, Lars Ljungqvist, optimal control theory, Recursive Macroeconomic Theory, Thomas J. Sargent
This could be interesting, too:
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Although this sounds extremely harsh, it is the only way to describe aspects of DSGE macro such as the assumption that the level of interest rates is a key determinant of economic behaviour. In practice, this assumption is built into all mainstream models, and the empirical methodologies have no way of rejecting the assumption. It is not entirely an accident that the consensus has been shocked by the slow pace of recovery after modern recessions -- after all, it was believed that the level of interest rates was "unsustainably low." Indeed, the natural rate of interest had to be revised lower in order for the data to fit the theory.
In other words, the whole panoply of mathematics used is a gigantic red herring.Fitting the world to a model doesn't work so well.
From the perspective of wanting to understand how the economy functions, there is only one real question: are the desired theoretical outcomes of DSGE macro practitioners useful? The fact that DSGE macro is roundly ignored by everyone whose job depends upon being right about the economy is probably the best answer to that question. (In theory, central bankers are supposed to care about being right about the economy, but in practice, even the raw incompetence displayed heading into 2007 did not cut into retired senior central bankers' subsequent speaking fees.)
From the perspective of academic economics, it is an obvious problem that this methodology has to be used in the "top journals." This is only a surprise if you assume that the academic system shows a tendency to progress towards the truth.…
The key criticsm from the POV of logical analysis and philosophy of science is this:
In Section 7.3, recursive competitive equilibrium is defined. It starts with a lot of mathematics, but even then, some economist hand-waving sneaks into the definition. They use terms that do not appear to correspond to standard mathematical concepts, and hope the reader knows what they mean. Mathematics largely consists of statements about sets and the property of sets; it is unclear what set properties they are describing at key sections of their definition.Math may look impressive but it says nothing that is not contained in the stipulations — definitions and axioms that relate them. In represesntational models these stipulation establish the semantic connection with the "world" that the model purports to represent. That world provides the objective criteria for assessing the how representative a model actually is in application.
Problems at this foundational level result in GIGO. There is no room for lack of specificty in mathematical reasoning.
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DSGE Wars (Again)
Brian Romanchuk