Why DSGE is such a spectacularly useless waste of time

Another very clear and consise explanation, Lars…


Noah Smith has a nice piece up today on what he considers the most “damning critique of DSGE:”

If DSGE models work, why don’t people use them to get rich?

When I studied macroeconomics in grad school, I was told something along these lines:

“DSGE models are useful for policy advice because they (hopefully) pass the Lucas Critique. If all you want to do is forecast the economy, you don’t need to pass the Lucas Critique, so you don’t need a DSGE model.”

This is usually what I hear academic macroeconomists say when asked to explain the fact that essentially no one in the private sector uses DSGE models. Private-sector people can’t set economic policy, the argument goes, so they don’t need Lucas Critique-robust models.

The problem is, this argument is wrong. If you have a model that both A) satisfies the Lucas Critique and B) is a decent model…

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Author: Damian Merciar

Damian Merciar is Managing Director of Merciar Business Consulting, http://www.merciar.com, a niche business economics consultancy founded in 1998. He has over twenty years experience in the areas of commercial Business Strategy. He is experienced in the transition environments of nationalized to private sector state utilities and the senior practice of commercial management, advisorial consultancy, and implementation. He has carried out policy advisory work for government ministries and been an adviser to institutional bodies proposing changes to government. He holds an MSc Economics from the University of Surrey’s leading Economics department and an MBA from the University of Kent. Also attending the leading University in the Middle East, studying International Relations and Language, for which he won a competitive international scholarship, and has a BA (Hons) in Economic History and Political Economy from the University of Portsmouth. He is currently based in London.

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