Have all sorts of practical fudges and hand variables ..no ?
Yes we got the basic physics there pretty damn good
but ....complexity and contradiction
When facing real stuff
Always always wins over analytic purity
On this new model building project
Monsieur la pee
The only way in which DSGEs can play this role is if they are built on explicit micro foundations. This is not because models with micro foundations are holier than others, but because any other approach makes it difficult to integrate new elements and have a formal dialogue. For those who believe that there are few distortions (say, the believers in the original real business cycle view of the world), this is a straightforward and natural approach. For those of us who believe that there are many distortions relevant to macroeconomic fluctuations, this makes for a longer and messier journey, the introduction of many distortions, and the risk of an inelegant machine at the end. One wishes there were a short cut and a different starting point. I do not think either exists.
