DSGE and the Market Test

Noah Smith writes,

In other words, DSGE models (not just “Freshwater” models, I mean the whole kit & caboodle) have failed a key test of usefulness. Their main selling point – satisfying the Lucas critique – should make them very valuable to industry. But industry shuns them.

Pointer from Mark Thoma.

A few years ago, I happened to run into Olivier Blanchard. I offered my complaint that folks like Stan Fischer and himself had made macroeconomics narrow and stilted. “We’ve passed the market test,” he replied. But the “market test” to which he referred is limited to academic macro. It is a supplier-controlled cartel, not a consumer market.

This entry was posted in Economic education and methods, Mark Thoma is Indispensable, PSST and Macro. Bookmark the permalink.

2 Responses to DSGE and the Market Test

  1. Dave says:

    I pointed out on MR that Thoma made a similar claim regarding academia being the market test years ago, with regards to Austrian economics.

  2. Frank says:

    Is it possible to generalize about what these private investors rely on instead and why that is regarded as a more reliable basis for forecasting than DSGE models?

Comments are closed.