Within the Economic Machine: Evaluating the Dynamic Stochastic General Equilibrium Model

Abstract

The Dynamic Stochastic General Equilibrium (DSGE) model is a model that is widely used in central banking today and has seen significant development in the past 20 years. However, the model still has important limitations and notable critics. This thesis provides a literature review into the history, structure and uses of the DSGE models within central banking as well as the most common criticisms made towards the DSGE framework. Understanding the DSGE model also gives significant insight into understanding general macroeconomic theory and modelling practices. The thesis finds that even though the DSGE framework has failed in predicting the biggest economic downturns, central banks can find good use cases for the model.