This article elaborates on a basic thesis: the formal estimation of dynamic stochastic generalequilibrium (DSGE) models has become one of the cornerstones of modern macroeconomics.The combination of rich structural models, novel solution algorithms, and powerful simulationtechniques has allowed researchers to transform the quantitative implementation of equilib-rium models from a disparate collection of ad hoc procedures to a systematic discipline whereprogress is fast and prospects entrancing. This captivating area of research, which for lack of a better name I call the
, is changing the way we think about modelsand about economic policy advice.In the next pages, I will lay out my case in detail. I will start by framing the appearanceof DSGE models in the context of the evolution of contemporary macroeconomics and howeconomists have reacted to incorporate both theoretical insights and empirical challenges.Then, I will explain why the New Macroeconometrics mainly follows a Bayesian approach. Iwill introduce some of the new techniques in the literature. I will illustrate these points witha benchmark application and I will conclude with a discussion of where I see the research atthe frontier of macroeconometrics. Because of space limitations, I will not survey the …eldin exhausting detail or provide a complete description of the tools involved (indeed, I willo¤er the biased recommendation of many of my own papers). Instead, I will o¤er an entrypoint to the topic that, like the proverbial Wittgenstein’s ladder, can eventually be discardedwithout undue apprehension once the reader has mastered the ideas considered here. The in-terested economist can also …nd alternative material on An and Schorfheide (2006), who focusmore than I do on Bayesian techniques and less in pure macroeconomics, and in Fernández-Villaverde, Guerrón-Quintana, and Rubio-Ramírez (2008), where the work is related withgeneral issues in Bayesian statistics, and in the recent textbooks on macroeconometrics byCanova (2007) and DeJong and Dave (2007).
2. The Main Thesis
Dynamic equilibrium theory made a quantum leap between the early 1970s and the late 1990s.In the comparatively brief space of 30 years, macroeconomists went from writing prototypemodels of rational expectations (think of Lucas, 1972) to handling complex constructions likethe economy in Christiano, Eichenbaum, and Evans (2005). It was similar to jumping fromthe Wright brothers to an Airbus 380 in one generation.2