Pesaran, M. and Smith, R. P.

Beyond the DSGE straightjacket

CWPE1138

Abstract: 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.

JEL Codes: C10 E10

Author links: M. Hashem Pesaran

PDF: https://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1138.pdf