Alternatives to Traditional DSGE Models

Initial Post: 2019-06-28. Last Updated: 2019-12-26.

Back in the old days, the term “macroeconomic model” generally meant that you started with the usual DSGE framework, one with a representative household and a representative firm and a rational expectations, where all the agents are solving an infinite horizon optimization problem. This reflected their real business cycle foundations. You’d then add some friction that didn’t belong in a real business cycle model and solve for the unique equilibrium. That is not a description of what I’d consider to be mainstream macroeconomic research today.

And that’s a good thing, because it’s not at all clear to me that the “add a new friction” strategy has taught us much about how the macroeconomy responds to shocks. I have outlined briefly my views on the goals of short-run macroeconomics here. This page outlines some reading on alternative approaches of a larger nature that have a chance at being fruitful.

Indeterminacy

Roger Farmer, “The Indeterminacy Agenda in Macroeconomics” lays out nicely the current state of the literature (as of early 2019) on multiple equilibria. link

Roger Farmer, “The Evolution of Endogenous Business Cycles” distinguishes between multiple equilibria and multiple steady states. link

Animal Spirits

Roger Farmer, “Animal Spirits” link

Finite Horizons

Michael Woodford, “Monetary Policy Analysis When Planning Horizons Are Finite” link

Rational Inattention

Chris Sims, “Rational Inattention and Monetary Economics” link

Monetary Authority Beliefs

Thomas Sargent, Noah Williams, and Tao Zha, “Shocks and Government Beliefs: The Rise and Fall of American Inflation” link

Learning

George Evans and Seppo Honkapohja, “Learning and Macroeconomics” link

Traditional Models

For a flavor of mainstream macro of a decade earlier, see Olivier Blanchard’s “The State of Macro” link

Another paper that shows the state of traditional DSGE models is Jordi Gali and Mark Gertler’s “Macroeconomic Modeling for Monetary Policy Evaluation” link