Beyond the Standard DSGE Model

Summary

Traditional DSGE modelling has been criticised for over-reliance on the assumption of the existence of a representative agent with costless access to perfect information, unlimited information processing capacities and costless computation. In fact, all of these assumptions are widely challenged in the theoretical, but technical challenges have prevented many of the innovations of these papers from entering medium-scale DSGE models. The objective of this research is to begin to address these technical challenges and to build a medium-scale DSGE model with heterogeneous agents, partial information, limited information capacities (rational inattention) and computation and information costs.

Objectives

There are two distinct approaches we wish to pursue. The first focuses on adapting the existing local-approximation DSGE framework to enable it to deal with these features. A second approach is to take inspiration from both the existing Agent-Based modelling literature and the classical heterogeneous agent and use simulation methods based on approximately optimal individual decision rules.

Publications

Paul Levine & Joseph Pearlman & George Perendia & Bo Yang, 2012. "Endogenous Persistence in an Estimated DSGE Model under Imperfect Information,"  Economic Journal, Royal Economic Society, vol. 122(565), pages 1287-1312.