Keynes, the dynamic stochastic general equilibrium model, and the business cycle
- Publication Type:
- Keynes and Modern Economics, 2013, 1st, pp. 85 - 116
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Keynes in his General Theory has extensively responded to and criticized the classical economics that was dominant at his time. This paper elaborates on how Keynes would have responded to the dynamic stochastic general equilibrium (DSGE) model, or its more popular version, the real business cycle model, that appears to dominate macroeconomics today. Recently also many New Keynesians have employed this new paradigm in macroeconomics. We will discuss some major macroeconomic issues and show how differences in traditional Keynesian and the DSGE models may arise.4 We will also pursue a further more detailed study of why certain Keynesian ideas can usefully be applied to modem macroeconomics. This will help to resolve some important puzzles of modem macroeconomic theory.
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