“I suspect it is because DSGE models are too often used in the wrong place to think about problems they are not particularly suited for”

I agree strongly with this statement.

“they don’t have adequate agent heterogeneity – even the overlapping generatins models don’t really capture the lifecycle aspects of real economies (eg retirement saving): See Clarida 1991 for a long ignored indictment of this problem;
they have a hugely simplistic approach to how firms really set prices;
they have a very simplistic approach to how banks and financial markets work;
they ignore almost all complexities of the tax system. ”

I agree those are all problems when it comes to implementing the model, my impression was that these issues had been noted – and central banks tend to fiddle their results from DSGE models to represent their views on these issues. It isn’t an ideal situation for sure – but I see the DSGE approach as something that is still being created rather than a final product.

“Possibly the most prescient modelling work by a macroeconomist before the events of 2007 was done by Hyun Sung Shin – using models of banks that weren’t DSGE models”

Interesting. I had not heard of this, but will look into it.

“But Solow is at least being consistent in his opposition. Do you recall his description of why he didn’t want to discuss macroeconomics with Lucas or Prescott using real business cycle models in the 1980s”

Indeed I do. However, I had the impression that he was in the current “New Keynesian” camp – when this really says that he is not.

Although, I guess the New Keynesians of the 1980’s were a very different breed to the modern New Keynesian – guess they need a new name.

“It all comes down to balance. DSGE models aren’t useful for everything, and often-times – particularly when considering a collapse of banking relationships – they aren’t useful at all.
The last few years have been one of those times.”

I agree with this also – by construction a DSGE model isn’t very good at handling large shocks and non-linear dynamics, which have to be the centrepoint of such events.

Personally, I have a number of concerns with the use of DSGE models, and I can definitely see how an over-reliance of “one model” when trying to understand the macroeconomy is dangerous. However, I felt that some of the claims Solow made here went too far – and were just too inaccurate, even with the understanding that he was explaining these issues to an audience of intelligent lay people.

I suspect it is because DSGE models are too often used in the wrong place to think about problems they are not particularly suited for. It is true they are getting better, in the sense they are now incorporating aspects of the real world that until recently have been incorrectly ignored as irrelevant. But it still beggars belief that they are used to anaylse monetary policy issues when :

they don’t have adequate agent heterogeneity – even the overlapping generatins models don’t really capture the lifecycle aspects of real economies (eg retirement saving): See Clarida 1991 for a long ignored indictment of this problem;
they have a hugely simplistic approach to how firms really set prices;
they have a very simplistic approach to how banks and financial markets work;
they ignore almost all complexities of the tax system.

Personally, I struggle to think of interesting question in monetary economics that DSGE models are suited to answer. But I was taught that most of the interesting questions in monetary economics concern the ways financial markets organise themselves to deal with the twin problems of bounded rationality and opportunism (I’m dumb; you’re scum), be they bank runs, counterparty arrangements, or the provision of liquidity, and my education completely ignored the idea that monetary economics was all about using interest rates to manipulate output gaps and phillips curves to fine tune the economy. One gets the sense Solow also grew up in a tradition that thought the interesting questions in monetary economics concerned the way the price, quantity and terms and conditions of nominal debt contracts affected the economy, and that models that incorporate all these aspects of financial contracts are needed to be generally useful. Possibly the most prescient modelling work by a macroeconomist before the events of 2007 was done by Hyun Sung Shin – using models of banks that weren’t DSGE models.

But Solow is at least being consistent in his opposition. Do you recall his description of why he didn’t want to discuss macroeconomics with Lucas or Prescott using real business cycle models in the 1980s”

“Suppose someone sits down where you are sitting right now and announces to me that he is Napoleon Bonaparte. The last thing I want to do with him is to get involved in a technical discussion of cavalry tactics at the Battle of Austerlitz. If I do that, I’m getting tacitly drawn into the game that he is Napoleon Bonaparte.”

It all comes down to balance. DSGE models aren’t useful for everything, and often-times – particularly when considering a collapse of banking relationships – they aren’t useful at all.
The last few years have been one of those times.
Andrew