DSGE Models are being thrashed everywhere. These are actually based on New Keynesian thinking which had become a vogue till this crisis. The New Keyensian thinking merges Keynes ideas (markets can fail) with classical economics (rational human beings). Wikipedia nicely explains it:
Two main assumptions define the New Keynesian approach to macroeconomics. Like the New Classical approach, New Keynesian macroeconomic analysis usually assumes that households and firms have rational expectations. But the two schools differ in that New Keynesian analysis usually assumes a variety of market failures. In particular, New Keynesians assume prices and wages are “sticky“, which means they do not adjust instantaneously to changes in economic conditions.
Wage and price stickiness, and the other market failures present in New Keynesian models, imply that the economy may fail to attain full employment. Therefore, New Keynesians argue that macroeconomic stabilization by the government (using fiscal…
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