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By C. B. Anker 26-03-2020

A Response To Macro Hive’s DSGE Deep Dive

(4 min read)
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This piece is written by someone who has built DSGE models at various central banks. They prefer to write anonymously:

Having read the recently published Macro Hive Deep Dive, Demystifying the DSGE Model, there are a few things to address.




First Things First

The models are only stable when the Taylor rule features a sufficiently strong long-run reaction to deviations of inflation from target. The nominal policy rate must move more than one-for-one with deviations of inflation from target. Here’s another way to think about it: the real interest rate needs to rise when inflation rises and vice versa.

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