A feeler on DSGE Models

Ever since I realised DSGE Models used by central banks have played quite an important role in this crisis, I have been trying to find some basic literature on the same (though we should never really blame the models for any crisis. Instead we should question the economists who build these models). DSGE Models are also used highly in number of papers and one needs to understand some basics to get some idea (whether we like it or not, DSGE has caught on big time with the economists) 

I pointed to a paper by Camilo Tovar of BIS which tells you basics of DSGE Models. However, it was more from theoretical point of view and still does not tell you how does one go about building a DSGE Model. He points to a number of papers on the subject but it requires quite an effort to search them etc….

I came across a short paper by Kirdan Lees of RBNZ which gives you a feeler about NZ’s DSGE Model called KITT or Kiwi Inflation Targeting Technology. A bit on DSGE:

Modern macroeconomic modellers develop their models from a set of microeconomic assumptions regarding the firms, households and policymakers that populate the economy. These models are DSGE (Dynamic Stochastic General Equilibrium) models and specify very particular assumptions. Relative to earlier DSGE models, the new generation of multi-sector macroeconomic models contains sufficient richness to model the interactions between households and firms in the different sectors of the New Zealand economy for forecasting and policy purposes.  “General equilibrium” models work with the assumption label” refers to the shocks that hit the economy. Unlike static general equilibrium models, “dynamic” general equilibrium models explicitly map the transition across steady-state or long-run equilibria.

The paper tells you a bit about the way RBNZ has organised the key economic actors (households, business etc) doing economic activities (consumption, producing tradeable and non-tradeable goods etc) into a model. Fairly well done.

However, again it does not really have a role for fiscal policy and financial frictions as the criticism goes. But it gives you a feeler on how do we think about building such DSGE models.

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2 Responses to “A feeler on DSGE Models”

  1. A feeler on DSGE Models « acc3ss.info Says:

    […] See the article here: A feeler on DSGE Models […]

  2. Getting finance into macro models « Mostly Economics Says:

    […] models/macro models don’t have a prominnent role for finance/financial frictions ( see this, this,this, […]

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