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Friday, February 14, 2014

'Are New Keynesian DSGE Models a Faustian Bargain?'

Simon Wren-Lewis:

 Are New Keynesian DSGE models a Faustian bargain?: Some write as if this were true. The story is that after the New Classical counter revolution, Keynesian ideas could only be reintroduced into the academic mainstream by accepting a whole load of New Classical macro within DSGE models. This has turned out to be a Faustian bargain, because it has crippled the ability of New Keynesians to understand subsequent real world events. Is this how it happened? It is true that New Keynesian models are essentially RBC models plus sticky prices. But is this because New Keynesian economists were forced to accept the RBC structure, or did they voluntarily do so because they thought it was a good foundation on which to build? ...

    Posted by on Friday, February 14, 2014 at 04:29 PM in Economics, Macroeconomics, Methodology | Permalink  Comments (33)

          


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