DSGE Models in Central Banks: Progress and Prospects

Christophe Cahn, Patrick Fève and Julien Matheron
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Christophe Cahn: Unknown
Patrick Fève: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement
Julien Matheron: Unknown

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Abstract: This chapter 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 chapter 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. Thefinalpartturnstoheterogeneous-agentNewKeynesian 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 Keynesian models; HANK; monetary policy; Policy analysis (search for similar items in EconPapers)
Date: 2026-10-21
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