How accounting accuracy affects DSGE models

Kim, Minseong (2016): How accounting accuracy affects DSGE models.

Abstract

This paper explores how accounting consistency affects DSGE models. As many DSGE models descended from real business cycle models, I explore a simple labor-only RBC model and then a simple capital-and-labor RBC model with an exogenous external sector introduced. The conclusion reached in this paper is that once an external sector is introduced, DSGE models may suffer from accounting inconsistency, unless disequilibrium or some non-orthodox theory of price level, real monetary supply or bonds is accepted. Then this paper explores several other cases that suffer from accounting inconsistency even without introduction of an external sector. In some of these cases, deficit spending may be a key to not falling into disequilibrium.

• Item Type: MPRA Paper
• Language: English
• Keywords: accounting consistency, DSGE, external sector, fiscal deficit
• Subjects: B - History of Economic Thought, Methodology, and Heterodox Approaches > B4 - Economic Methodology > B41 - Economic Methodology; E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E13 - Neoclassical; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

References

Barro, R. (1974). ``Are Government Bonds Net Wealth?'' Journal of Political Economy 82 (6): 1095-1117

Gali, J (2014), ``The Effects of a Money-Financed Fiscal Stimulus'', CEPR Discussion Paper 10165, September.

Rotemberg, J. (1982). ``Sticky Prices in the United States'', Journal of Political Economy 90 (6): 1187-1211.

Smets, F., and Wouters, R. (2007). ``Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach.'' American Economic Review, 97(3): 586-606.