Agent-based Macroeconomics and Dynamic Stochastic General Equilibrium Models: Where do we go from here?

Dilaver, Ozge, Jump, Robert and Levine, Paul (2018) Agent-based Macroeconomics and Dynamic Stochastic General Equilibrium Models: Where do we go from here? Journal of Economic Surveys, 32 (4). pp. 1134-1159. ISSN 0950-0804

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Abstract

Agent-based computational economics (ACE) has been used for tackling major research questions in macroeconomics for at least two decades. This growing eld positions itself as an alternative to dynamic stochastic general equilibrium (DSGE) models. In this paper, we provide a much needed review and synthesis of this literature and recent attempts to incorporate insights from ACE into DSGE models. We rst review the arguments raised against DSGE in the macroeconomic ACE (macro ACE) literature, and then review existing macro ACE models, their explanatory power and empirical performance. We then turn to the literature on behavioural New Keynesian models that attempts to synthesise these two approaches to macroeconomic modelling by incorporating insights of ACE into DSGE modelling. Finally, we provide a thorough description of the internally rational New Keynesian model, and discuss how this promising line of research can progress.

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