DSGE Models in Central Banks: Progress and Prospects

Christophe Cahn, Patrick Fève and Julien Matheron

Working papers from Banque de France

Abstract: This paper traces how dynamic stochastic general equilibrium (DSGE) models became a central tool for quantitative policy analysis in Central Banks. Their appeal grew out of the shortcomings of large-scale macroeconometric models, the Lucas and Sims critiques, and the gradual shift from real-business-cycle theory to the New Keynesian framework. The paper reviews the medium-scale DSGE model that became standard in policy institutions, as well as extensions dealing with unemployment, open-economy transmission, financial frictions, and fiscal policy. It also discusses the practical machinery (solution, estimation, forecasting, and counterfactual analysis) through which these models are brought to the data and used in policy work. The final part turns to heterogeneous-agent New Keynesian models (HANK), where incomplete markets and distributional heterogeneity reshape the transmission of monetary and fiscal policy. The central claim is that DSGE models remain valuable less as definitive descriptions of the economy than as a disciplined way to connect theory, data, and policy experiments, while identifying where richer mechanisms are needed.

Keywords: DSGE Models; Central Banks; New Neoclassical Synthesis Models; HANK; Monetary Policy; Policy Analysis (search for similar items in EconPapers)
JEL-codes: C11 D14 D31 E32 E52 E58 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2026
New Economics Papers: this item is included in nep-cba, nep-dge, nep-hpe, nep-inv and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:1066

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