In response to the criticisms by Joe Stiglitz of new Keynesian DSGE models I argue that a simplified version of the model that he criticizes can provide a framework for contemporary macroeconomic analysis. The simple extended new Keynesian or SENK model which I propose brings together the analysis of longer-term economic growth with the analysis of shorter-term economic fluctuations. It is a stripped-down version of a synthesis of the RBC model with capital accumulation (due to Kydland and Prescott) and the “science-of-monetary-policy” model (due to Clarida, Gali and Gertler) a model which can be found papers by Smets and Wouters and Christiano, Eichenbaum and Evans. This SENK model provides valuable intuitive insight, both in understanding discussions of contemporary economic policy, and in helping to understand the econometric DSGE models used in central banks. The new Keynesian macroeconomic research programme is itself expanding in in two complementary ways. Analytical developments include innovations which can be added as embellishments of the SENK model. These include risk premia facing firms, the existence of credit-constrained consumers, and the presence of real wage resistance. They also involve addition to the model of the kind of non-linearities needed to capture the existence of large and persistent economic downturns and booms and changes in economic structure that go beyond traditional business cycle analysis. Empirical extensions are also being made to the SENK model. The narrowly optimising microfoundations of the model are being gradually relaxed (using the insights of behavioural economics and complex systems analysis), thereby enabling a more detailed, and careful, empirical analysis of macroeconomic systems. In sum, the moves which I describe in this paper, based on the foundation provided by the SENK model, are, I believe, making new Keynesian DSGE models more nearly fit for purpose.
Keywords: DSGE, multiple equilibrium, toy models, structural economic models
JEL classification: A23, A31, B22, B41, E007
About the speaker
David Vines is Professor of Economics, and a Fellow of Balliol College, at the University of Oxford. He is also Adjunct Professor of Economics at the Australian National University, and a Research Fellow of the Centre for Economic Policy Research. From 2008 to 2012 he was the Research Director of the European Union’s Framework Seven PEGGED Research Program, which analysed Global Economic Governance within Europe. Professor Vines received a BA from Melbourne University in 1971, and subsequently an MA and PhD from Cambridge University. From 1985 to 1992 he was Adam Smith Professor of Political Economy at the University of Glasgow. His research interests are in macroeconomics, including financial frictions, fiscal and monetary interactions, and financial crisis. His recent books include: The Leaderless Economy: Why the World Economic System Fell Apart and How to Fix It (Princeton University Press, 2013, with Peter Temin); The IMF and its Critics: Reform of Global Financial Architecture (Cambridge University Press, 2004, with Christopher Gilbert) and The Asian Financial Crisis: Causes, Contagion and Consequences (Cambridge University Press, 1999, with Pierre-Richard Agénor, Marcus Miller, and Axel Weber)
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