How do policymakers use DSGE/RBC models?

General DSGE Modeling
1

Hi,

I have been wondering how DSGEs are used by policymakers. I have read a couple of empirical papers that say empirical evidence (say from an SVAR or local projection model) can help us distinguish between DSGE models. But these so-called evidence are many times more narrow. For example, one researcher may examine empirical evidence on the effect of government spending shock on consumption and conclude that the RBC model is a better fit for the data for that economy. Another researcher will examine the effect of TFP on labor and conclude that NK models are better for the same economy. Maybe, another author will empirically estimate the effect of another shock on another variable and conclude RBC is a better fit for the data for that economy.

Do policymakers then use different models to study different shocks? I ask because if you study one shock and conclude that RBC predictions match empirical evidence, but you study another shock and find that predictions of the NK model match empirical evidence better, can you use different models to study different shocks for the same economy?

2

I can’t speak to what policymakers do.

But usually, you use a model suitable for the question at hand. I don’t central bankers use RBC models because they are unsuitable to inform the conduct of monetary policy. Price rigidities seem to matter at business cycle frequency. That may be different for questions of tax or pension reform that have effects at longer horizons where price rigidies may not matter much.