How Not To Defend DSGE Macro

I used to be quite animated in my dislike for Dynamic Stochastic General Equilibrium (DSGE) models, but my attitude has shifted: I have declared victory and gone home. At present, I only have a somewhat disinterested academic pursuit on one topic: are DSGE models actually mathematical models? Whether or not that is the case does not really affect the question of whether they are useful. The recent attempt at a defence by Christiano, Eichenbaum, and Trabandt confirmed my attitude; it was such a spectacular intellectual failure that it is not worth taking seriously.

Noah Smith has done an impressive smackdown on the paper on his website here. Noah Smith is probably one of the most sympathetic backers of mainstream macro outside of academia, and even he thought this attempt at defending DSGE macro was ridiculous (the "cackling cartoon villain" defense of DSGE).

If we rephrased the arguments of Christiano, Eichenbaum, and Trabandt, they are perhaps reasonable. One could argue that we need to use a modelling strategy similar to the one used by DSGE modellers to account for:

1.  a shifting policy environment; 
2. and to take into account macro relationships between all variables.

The first point is a lot more straightforward than economic arguments would suggest. For example, we cannot blindly rely on some regression model that is fit to data in one economic regime, and then extrapolate those results to a new institutional environment. Although this was allegedly the big insight of the forefathers of DSGE macro, it is an obvious point that I believe that most Keynesian economists were aware of. Keynes was not exactly a cheerleader for the early econometric work.

The second point -- that we need to take into account all macro relationships, and not reason from a partial analysis -- is the defining characteristic of macroeconomics. Keynes' discussion of effects such as the fallacy of composition are what drove the creation of a sub-discipline of macroeconomics in the first place.

Although those are reasonable points, it does not mean that DSGE macro actually fulfils those objectives. (One could easily raise doubts about other methodologies, including my preferred stock-flow consistent models.) I cannot hope to settle debates on those lines here.

However, the paper by Christiano, Eichenbaum, and Trabandt went completely off the rails when compared to that reasonable line of argument. In the abstract, we read:

One strategy is to perform experiments on actual economies. Unfortunately, this strategy is not available to social scientists. The only  [emphasis in original - BR] place that we can do experiments is in dynamic stochastic general equilibrium (DSGE) models.

They literally argue that no other economic modelling methodology even exists.

I would note that other DSGE researchers were somewhat horrified by the abstract as well. However, it finally explicitly raises a point that was always implicit in the DSGE literature: do they acknowledge the existence of other research programmes? In practice, the answer was they did not do so, which is exactly what the abstract suggests they should do.

As an outsider, one can only revise down one's opinion of the academic standards of mainstream economists. We have an intellectual debate in which one side refuses to admit the existence of the debate in the first place. I am not an expert on the scientific method, but it seems to me that is not how it is supposed to work.

(c) Brian Romanchuk 2017