Do DGSE models suck?

DGSE stands for Dynamic General Stochastic Equilibrium, basically it’s very complicated models that try to explain what’s going on in the economy. These models are nowadays widely used in policy relevant institutions such as the central banks. For several years, their reliability has however been  put into question, notably for their lack of forecast of the last financial crisis. This article is the first of a series which will talk about the relevance of DGSE models in modern macroeconomics. As you will see, opinions with regards to DGSE models are extremely heterogeneous, I will thus try to summarize the different points of views and highlight the different arguments.

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Public spending – was Keynes right?

As we have seen, one can ask the question whether policies that followed the financial crisis were truly beneficial and well-oriented. After 2008, austerity has been on the lips of a large part of economic deciders. 8 years after, one cannot say that it has done miracles.

One can thus honestly ask whether mistakes were made. For a long time, public spending has been regarded as dangerous which might cause debt problems and lead the doom of a country’s economy. As it is however always more accepted among economists is that the crisis, notably in Europe, was not a sovereign debt-crisis. Given this, arguing that increases in spending would be extremely dangerous, as it would worsen the situation loses in relevance. There is moreover a growing mass of work that shows the positive effects of spending policies.