Financial Instability and Frictions: Can DSGE Models Finally Address the Critical Issues?

Hans-Michael Trautwein ()
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Hans-Michael Trautwein: Carl von Ossietzky Universität Oldenburg

A chapter in Financial Markets in Perspective, 2022, pp 227-248 from Springer

Abstract: Abstract New Keynesian Economics that rely on the DSGE technology has been criticized as being hopelessly inadequate for dealing with financial crises of the type that we have seen in recent years or—more generally—with failures of the intertemporal price mechanism to coordinate investment and saving. However, the “financial frictions” literature has made considerable progress in using DSGE frameworks for modeling (shadow) banking, credit cycles, and financial crises. This paper provides an assessment of what has been achieved by the reformulations of the DSGE approach and what inadequacies remain in the light of the approaches of Keynes, Fisher, Minsky, and others.

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:spr:spshcp:978-3-030-86753-9_13

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DOI: 10.1007/978-3-030-86753-9_13

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