The future of macroeconomics: Macro theory and models at the Bank of England
David Hendry and
John Muellbauer ()
No 832, Economics Series Working Papers from University of Oxford, Department of Economics
The adoption as policy models by central banks of representative agent New Keynesian dynamic stochastic general equilibrium models has been widely criticised, including for their simplistic micro-foundations. At the Bank of England, the previous generation of policy models is seen in its 1999 medium-term macro model (MTMM). Instead of improving that model to correct its considerable flaws, many shared by other non-DSGE policy models such as the Federal Reserveâ€™s FRB/US, it was replaced in 2004 by the DSGE-based BEQM. Though this clearly failed during and after the global financial crisis, it was replaced in 2011 by the DSGE COMPASS, complemented by a â€˜suite of modelsâ€™. We provide a general critique of DSGE models for explaining, forecasting and policy analyses at central banks, and suggest new directions for improving current empirical macroeconomic models based on empirical modelling broadly consistent with better theory, rather than seeking to impose simplistic and unrealistic theory.
Keywords: DSGE; central banks; macroeconomic policy models; finance and the real economy; financial crisis; consumption; credit constraints; household portfolios; asset prices (search for similar items in EconPapers)
JEL-codes: E17 E21 E44 E51 E52 E58 G01 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-hpe and nep-mac
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