Macromodels V --- DSGE

Beyond IS-LM

We already mentioned the DSGE model, which we will discuss in a later chapter.

There is another more minimal extension of IS-LM, the AD-AS model (Aggregate Demand–Aggregate Supply) but it does not significantly patch any of the flaws in IS-LM, so is still a Zero Informative model. We will instead, after briefly looking at DSGE, jump to a more MMT-like model due to the economist Dirk Ehnts — the so-called ISMY model. This model was developed for analyzing the EMU (European Monetary Union) system of interlinked state economies, so is not a complete MMT model. MMT models would apply to single currency regions where there is a monopoly fiscal authority called “the government”. No such institution exists for the EMU.

Collectively the EU governments plus the ECB act as if there were a monopoly government, but the fiscal space is so constrained that using such an “effective government” frame is probably unwise. It obscures the full fiscal space that is available to a monopoly currency issuer with full legislative power and control over the central bank and all commercial banks. More importantly, for political purposes, it is just a bad idea to say the EMU “has a government,” since that tends to insert in the mind the notion of some kind of democracy, but this is entirely lacking in the EU/EMU. Where there is no democracy is is a bad thing to pretend there is one, since a democracy is probably not a bad system of government to have in part. So if a corrupt elite-power driven government is falsely though of as having democratic elements, and the result is austerity and poverty, and evisceration of the working class, then it is better to call that institution The Oligarchy, not “the government”. Placing fault where fault belongs.

I think we can thus skip AS-AD models and go straight to DSGE.

DSGE Models

Oh my lord, do we really need to?