According to Olivier Blanchard,
I suspect that even DSGE modelers will agree that current DSGE models are flawed. But DSGE models can fulfill an important need in macroeconomics, that of offering a core structure around which to build and organize discussions. To do that, however, they have to build more on the rest of macroeconomics and agree to share the scene with other types of general equilibrium models.
Pointer from Mark Thoma.
Actually, he does not even mention what I believe is the main flaw with this approach to macroeconomics. As I point out in Specialization and Trade, that flaw is the failure to include specialization at all. Instead, there is one type of worker producing one type of good. This is obviously unwise once you consider it, but once you consider it you are no longer a respectable macroeconomist.
I would say the largest flaw is everything important is exogenous and even accepting that predictions have been poor. Possibly improving but a very long way to go.
Just a bizarre read. 1. Everything is based on micro foundations. 2. Those micro foundations are numerous. 3. Those micro foundations range from “fuzzy” to probably wrong.
Conclusion- We should build our core structure around this.
This is like the drunk looking for his keys under the streetlamp, only without the excuse of being drunk or a working streetlamp.
Is there anything significant we know about the real-world economy that we would not have known were it not for the advent of DSGE models? I can’t think of anything. And we know that DSGE models are not very good at forecasting. So why shouldn’t a reasonable person conclude that all of the time and effort put into them has been wasted?