Jon Faust
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DSGE Models: I Smell a Rat (and It Smells Good)

Author: Jon Faust

Source: International Journal of Central Banking, March 2012

Abstract: DSGE models have now reached a point where they can and do serve an important role in the monetary policy process. From the standpoint of real-world policymaking, however, there remain important areas of omission and coarse approximation in these models. I argue that macroeconomics should follow other fields such as toxicology in having a formal literature on how best to use models that are far from perfect as a basis for public policy.