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Monday, August 2, 2010

Ridiculous Assertion of the Day...

The following is an excerpt from V.V. Chari's recent congressional testimony:
"All the interesting policy questions involve understanding how people make decisions over time and how they handle uncertainty. All must deal with the effects on the whole economy. So, any interesting model must be a dynamic stochastic general equilibrium model. From this perspective, there is no other game in town. Modern macroeconomic models, often called DSGE models in macro share common additional features. All of them make sure that they are consistent with the National Income and Product Accounts. That is, things must add up. All of them lay out clearly how people make decisions. All of them are explicit about the constraints imposed by nature, the structure of markets and available information on choices to households, firms and the government. From this perspective DSGE land is a very big tent. The only alternatives are models in which the modeler does not clearly spell out how people make decisions. Why should we prefer obfuscation to clarity? My description of the style of modern macroeconomics makes it clear that modern macroeconomists use a common language to formulate their ideas and the style allows for substantial disagreement on the substance of the ideas. A useful aphorism in macroeconomics is: "If you have an interesting and coherent story to tell, you can tell it in a DSGE model. If you cannot, your story is incoherent."
This, quite simply, is hogwash.

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