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Macroeconomic Policy in DSGE and Agent-Based Models

Giorgio Fagiolo () and Andrea Roventini ()

No 2012-17, EconomiX Working Papers from University of Paris West - Nanterre la Défense, EconomiX

Abstract: The Great Recession seems to be a natural experiment for macroeconomics showing the inadequacy of the predominant theoretical framework - the New Neoclassical Synthesis - grounded on the DSGE model. In this paper, we present a critical discussion of the theoretical, empirical and political-economy pitfalls of the DSGE-based approach to policy analysis. We suggest that a more fruitful research avenue to pursue is to explore alternative theoretical paradigms, which can escape the strong theoretical requirements of neoclassical models (e.g., equilibrium, rationality, representative agent, etc.). We briefly introduce one of the most successful alternative research projects - known in the literature as agent-based computational economics (ACE) - and we present the way it has been applied to policy analysis issues. We then provide a survey of agent-based models addressing macroeconomic policy issues. Finally, we conclude by discussing the methodological status of ACE, as well as the (many) problems it raises.

Keywords: Economic Policy; Monetary and Fiscal Policies; New Neoclassical Synthesis; New Keynesian Models; DSGE Models; Agent-Based Computational Economics; Agent-Based Models; Great Recession; Crisis (search for similar items in EconPapers)
JEL-codes: B41 B50 E32 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-cmp, nep-dge and nep-mac
Date: 2012
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