Comfort of Conformity

Abstract

Abstract A reality check on dynamic, stochastic general equilibrium (DSGE) models was overdue and Servaas Storm has filled the void. His sharp, complete, yet succinct analysis of these models’ shortcomings is a stepping stone for macroeconomists who want to move on. Macroeconomic policy has been captive to “evil twins,” DSGE and computable general equilibrium (CGE) models, inheriting their disconnect from some of reality’s most pressing problems. The latest example is the Italian government’s plan to recover from the COVID-19 crisis, which showcases these models’ inability to account for demand-driven growth. Better models exist but require more investment to break the blockade of current expert opinion.