DSGE models still useful in policy analysis?

• Published in: Oxford review of economic policy Vol. 34; no. 1/2; pp. 269 - 286
• Main Author: Lindé, Jesper
• Format: Journal Article
• Language: English
• Published: UK Oxford University Press 05-01-2018
• Subjects: monetary and fiscal policy; financial crisis; New Keynesian economics; core and satellite models; macroeconomic models; criteria for useful policy models
• ISSN: 0266-903X; 1460-2121
• DOI: 10.1093/oxrep/grx058

This paper discusses the usefulness of DSGE models in monetary and fiscal policy analysis. While the recent crisis has exposed some weaknesses in these models, I argue that DSGE models currently have few contenders to replace them as core models in the policy process. The prominent role for forward-looking behaviour and their simplicity make DSGE models very suitable for policy analysis. In addition, DSGE models are flexible enough to be used for many purposes, while other models are often more limited in terms of the questions they can address. As a result, I argue that improved DSGE models—modified to take the lessons of the recent crisis into account—will remain as a workhorse tool in many policy institutions for a long time to come.