The New Keynesian Economics Models: Structure, Disadvantages and Perspectives

Though DSGE models have provided very modest macroeconomic modeling results, they have enjoyed some massive support both from theorists and practitioners. To find an explanation for this state, this paper reviews the reasons why DSGE models fail to perform. For this purpose, first we present the opinions of leading American economists on DSGE models before the Committee on Science and Technology, U.S. House of Representatives in 2010. According to many experts in the USA, DSGE models are considered to be one of the main culprits of the recent economic crisis. Then we provide our own analysis where we point to some relevant drawbacks in the models´ construction that may lead to their failure. They are the continuum notion, log-linearization issue and natural production concept. Finally, we suggest the return to the endogenous cycle macroeconomic modeling approach as an alternative solution to DSGE models. In our opinion, this approach may better capture the more complex nature of economic processes with the existence of non-periodic oscillation and chaos. With respect to the current state of macroeconomic modeling, we consider both microeconomic and macroeconomic approaches at least as two equivalent alternatives.