Spanish paper preaches caution over DSGE models
Dynamic stochastic general equilibrium (DSGE) models "have to be used with caution", according to a working paper published by the Bank of Spain last week, as they "can lead to mistaken policy evaluation at critical times".
The paper, DSGE Models and the Lucas Critique, by Samuel Hurtado, finds that even "allegedly deep" parameters employed in DSGE models can undergo "significant structural change".
The author examines whether – taking into account this ‘parameter drift' – policy-makers in the
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