Why Do We Need to Replace DSGE Models? A Critical View on Pre-Crisis Central Bank Models

Abstract

In this paper, we critically address pre-crisis central banking doctrine from a methodological standpoint. We argue that the underpinnings of the reigning paradigm before the crisis account for its paradigmatic failure both to predict the global crisis, and be a reliable source of inspiration for post-crisis policies. We insist on DSGE models, and emphasize the need for enhanced understanding of macro-financial interactions. In a second part, we sketch out three research directions aimed at overcoming the shortcomings of pre-crisis models. We respectively consider the merits of ensemble modeling, Homo Socialis and agent-based modeling. Finally we conclude.

Keywords: Monetary policy, DSGE models, post-crisis models

JEL Classification: E58, C50