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Tuesday, April 03, 2012

Classes of Macro Models: What Counts as a DSGE Model?

In a tweet yesterday, one that Steve Keen posts here, I say (after noting that New Keynesian models are DSGE):

...RBC models can surely be categorized as DSGE

Keen then says:

Thoma believe[s] that DSGE models exclusively refer to NK models?

Uh, no. Just read what I said. I can't even call this a nice try. He also says:

I won’t accept Thoma’s excuse for your [Krugman's] behaviour—and nor do some of his own followers

First, it wasn't about Krugman at all. It was about Keen saying something wrong. Second, what do my followers really say (only one actually replied)? That Keen is wrong:

I agree with you. Two very different things

And:

Hence your point with Keen was a good one. I am constantly telling my students to be precise in the use of their "language"

If the only way to win an argument is to misrepresent people to this extent, it isn't a win. To use Keen's term, it's a gigantic "FAIL".

Now let me back up. My point was fairly simple, I said that I didn't consider New Classical models (i.e. information confusion models) DSGE models. Keen claimed they were in trying to defend himself against a charge made by Krugman, and I disagreed. To me, DSGE refers to something different (mainly, but not exclusively, the classes of NK and RBC models). But I also said that I could see how someone could make this argument, especially since NC models provided the intellectual foundation for modern macro models (RE, microfoundations, and equilibrium analysis mainly). Nevertheless, I don't think the term DSGE applies to NC models.

More to the point, however, Keen showed a lack of familiarity with modern models and I am still not sure that he knows the difference between NK, NC, RBC, and NM models, NC and RBC in particular (New Keynesian, New Classical, Real Business Cycle, and New Monetarist). The discussion by Keen just before his figure 3 -- the part that quotes Wikipedia for the authoratative answer as to whether NC models are DSGE -- doesn't even mention NC models. And Keen seems to imply that RBC=NC. That is, he thinks the statement in the Wikipedia quote that "Real business cycle (RBC) theory builds on the neoclassical growth model" means that the RBC model is the same as the NC model. That's wrong (the NC model generates non-neutralities and business cycles through information confusion, the RBC model is driven by productivity and preference shocks, information confusion is not present in these models -- also, the NC model has faded since its heyday a couple of decades or so ago and it's nota model that macroeconmists generally use today).

As I said in a series of tweets that set this off, I think it's possible to debate this. I don't think DSGE applies to NC, but there's at least an argument to be made. But a rational, reasoned argument is not the response I got (except for quotes from Wikipedia that don't actually support the argument). Instead, Keen misrepresened what I said to try to win the argument. I doubt it was intentional, I'll gi9ve the benefit of doubt -- it's more likely that the finer points were not understood.

Mostly I just want to corrct the record, not start a big fight. I don't like having people read that I think DSGE only applies to NK models when that is clearly not what I said. But let me at least try to end on a constructive note by posing a question: What defines a DSGE model? Is the NC model a DSGE model?

Update: Menzie Chinn emails what I think is the correct distinction. DSGE is a technique that can be applied to models of various types:

Hi Mark,
I have been out on the road and not following closely debates, but I am a bit mystified by the argument over DSGE definitions.
I think of New Keynesian, New Classical, and Real Business Cycle models as approaches. I think of DSGE primarily as a numerical methodology often involving calibration, but not always, but is solved out somehow, that implements one of those approaches.
One can have a New Keynesian model that is just for explication purposes – I think of Blanchard Kiyotaki. Or one can write out a dynamic stochastic general equilibrium model that incorporates New Keynesian attributes (monopolistic pricing, sticky prices, intertemporal optimization) or RBC attributes (flex price, big technology shocks with AR1s in the error terms of the shock processes). Wouldn’t that be a clearer way of differentiating?

Yes, but again, it would be very unusual to bring these techniques to the old-fashioned New Classical models. Thus, calling the NC model a DSGE model is quite a stretch.

Update: See Describing DSGEs too.

    Posted by on Tuesday, April 3, 2012 at 11:32 AM in Economics, Macroeconomics, Methodology | Permalink  Comments (42)


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