DSGE and Why It’s “Broken” – Paper Scrap

DSGE

Dynamic Stochastic General Equilibrium, or DSGE model has been the most dominant recent macroeconomic model in the recent economic history. The name Dynamic Stochastic General Equilibrium does tell some interesting characteristic that the model possesses. “Dynamic” being the simplest part of the model just suggests that the model over goes a progress of constant change. The term “Stochastic” is defined as a correspondence to a particular type of manageable unpredictability built into the model that demonstrates events like oil shocks and/or technological changes. The model attempts to assume it can predict these shock mathematically and the events that the model cannot predict are simply uninsured and ruled out of the results. “General” means that the model incorporates almost all of the markets of our macroeconomic economy. The “Equilibrium” part of the model’s name shows that the model accepts that demand and supply balance out quickly and accurately, as well as these markets are assumed to have competition that is untouched by surpluses, shortages as well as involuntary unemployment.

The model that we talk about per say are not broken or failing but the main issue is that, the model is not dynamic enough for such large macroeconomy that we have today. The economy is always changing and there will be shocks that models will not be able to highlight or incorporate. As dynamic the economy is, to make an accurate model the model needs to be dynamic as well. The models that have been famous and are currently in place might work for a period of time but will always fail in the end due to their unchanging nature.