An essay on the history of DSGE models

Abstract

Dynamic Stochastic General Equilibrium (DSGE) models, which are nowadays a crucial element of the set of quantitative tools that policy-makers have, did not emerge spontaneously. They rely on previously established ideas in Economics and relatively recent advancements in Mathematics. I aim to provide a comprehensive coverage of their history, starting from the pioneering Neoclassical general equilibrium theories and eventually reaching the New Neoclassical Synthesis (NNS). I thoroughly present the mathematical tools involved in formulating a DSGE model. I claim that this history has a mixed nature rather than an absolutist or relativist one, that the NNS may have emerged due to the complementary nature of New Classical and New Keynesian theories, and that the recent adoption and development of DSGE models by central banks from different countries has entailed a departure from the goal of building a universally valid theory that Economics has always had. The latter means that DSGE modeling has landed not without loss of generality.