Caballero (2010) Describes the “Dynamic Stochastic General Equilibrium” Model Class as “an Irresistible Snake-Charmer”

The Great Recession seems to be creating a change in the trend of macroeconomic thinking. Prior to the financial crisis of 2008, dynamic stochastic general equilibrium (DSGE) models dominated the macroeconomics literature without any apparent challengers on the horizon. Since then, however, we have seen an increasing interest in macroeconomic models that address the state of confidence (“animal spirits”), complexity, cognition, and radical uncertainty. . . .

Most of the renewed interest in animal spirits, complexity, cognition, and radical uncertainty has come from a more or less “Keynesian” perspective and might alternatively be described as the “return of interventionism.” We note that rejecting the stale theoretical approach of the last few decades could just as well coincide with a greater appreciation of capitalism in general and the market process in particular. Caballero (2010) illustrates the potential to emphasize animal spirits, complexity, cognition, and radical uncertainty from a more “Hayekian” perspective. Indeed, we believe that we may be seeing the revival of old disputes between Keynesian and Hayekian perspectives in macroeconomics. Whether (and to what extent) self-consciously “Austrian” economists will contribute, should these disputes reemerge, may depend on whether they prove themselves able to enter the conversation in a constructive and understandable way. . . . 

__________

Caballero (2010)—who warns against “the pretense of knowledge”—provides support for our claim that macroeconomic thinking is moving in a direction more favorable to Austrian insights. He describes the DSGE model class as “an irresistible snake-charmer” and calls for a radical change in macroeconomics (p. 86). “The root cause of the poor state of affairs in the field of macroeconomics,” according to Caballero (2010, p. 100), “lies in a fundamental tension in academic macroeconomics between the enormous complexity of its subject and the micro-theory-like precision to which we aspire.”

—Roger Koppl and William J. Luther, “Hayek, Keynes, and Modern Macroeconomics,” Review of Austrian Economics 25, no. 3 (September 2012): 224, 235.