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The scientific foundation of dynamic stochastic general equilibrium (DSGE) models

de Grauwe, Paul (2010) The scientific foundation of dynamic stochastic general equilibrium (DSGE) models. Public Choice, 144 (3-4). pp. 413-443. ISSN 0048-5829

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Abstract

DSGE-models provide a coherent framework of analysis. This coherence is brought about by restricting acceptable behavior of agents to dynamic utility maximization and rational expectations. The problem of the DSGE-models (and more generally of macroeconomic models based on rational expectations) is that they assume extraordinary cognitive capabilities of individual agents. In addition, these models need a lot of ad-hoc assumptions to make them fit the data. I argue that we need models that take into account the limited cognitive abilities of agents. One can introduce rationality in such models by assuming “trial and error“ learning. I propose such a model and I analyze its implications.

Item Type: Article
Official URL: http://www.springerlink.com/content/100332/
Additional Information: © 2010 Springer
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E13 - Neoclassical
E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E17 - Forecasting and Simulation
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General
Sets: Departments > European Institute
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 05 Oct 2012 14:20
URL: http://eprints.lse.ac.uk/46610/

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