An essay on the history of DSGE models

Abstract

Dynamic Stochastic General Equilibrium (DSGE) models are nowadays a crucial quantitative tool for policy-makers. However, they did not emerge spontaneously. They are built upon previously established ideas in Economics and relatively recent advancements in Mathematics. This essay provides a comprehensive coverage of their history, starting from the pioneering Neoclassical general equilibrium theories and eventually reaching the New Neoclassical Synthesis (NNS). In addition, the mathematical tools involved in formulating a DSGE model are thoroughly presented. I argue that this history has a mixed nature rather than an absolutist or relativist one, that the NNS may have emerged due to the complementary nature of New Classical and New Keynesian theories, and that the recent adoption and development of DSGE models by central banks from different countries has entailed a departure from the goal of building a universally valid theory that Economics has always had. The latter means that DSGE modeling has landed not without loss of generality.

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Reproductions