Mankiw’s introduction to DSGE

I genuinely want to know if this does anything for anyone. Does understanding the basics of DSGE help you understand the economy better (vs. the traditional AD/AS model or vs. whatever theory you have floating in your head)? Does it help you understand the current recession better?

Seriously, what do you think? I’m teaching intermediate macro out of Mankiw’s book this summer and I’m wondering if this chapter is worth it or not.

10 thoughts on “Mankiw’s introduction to DSGE”

  1. It depends on what you mean. It’s going to be marginally helpful for people going to graduate school.

    For anyone else? Somewhat… it’s more explicit and much cleaner than the AD-AS framework derived from IS-LM.

    It’s better than the comparable chapter in Chad I Jones’ book, which I’ve been plugging like crazy left and right.

    I would have preferred for him to go even further, since, I hope no one get insulted if I say it, the undergraduate economics education in the US lags BADLY behind what people are doing in Europe and Asia, where undergraduates are treated like adults and not everything needs to be dumb-down and sanitized of any nontrivial math.

  2. I found the chapter well written, but not particularly challenging. In fact, I remember most of this stuff from my undergraduate honors macro course from 1989. I would prefer to actually see the household and firm foundations from a DSGE model.

    The best part is Figures 14-7 through 14-11. They comprise the key point of the whole chapter. Every well-educated person should have some intuition of how a temporary perturbation has long lasting effects. However, Mankiw doesn’t go far enough. There should be at least three more pairs of figures that _combine_ two different perturbations: one for supply shock + demand shock, one for a supply shock + monetary policy change, and one for a demand shock + policy change. Then the reader could appreciate the difficulty of what the Fed is trying to do in titrating policy to match shocks.

  3. >> “Is economics general education in Europe?”

    Is that question for me? I’m not sure I understand.

    I was referring to undergraduate material. What we did in the second part of the program was material that here would be Masters or 1st year PhD, in several cases.

    Also, it’s OK to ask for calculus and such starting with the first Economics class because it’s an admission requirement (at Economics schools).

  4. I’ll read it tonight and give my opinion, especially based on the opinion of someone who would want to go into finance but not economics proper. What’s the tradeoff – what would you not teach to teach this?

  5. The treatment by Carlin and Soskice in their undergraduate textbook is much deeper and richer (though they still fail to point out the failings of the approach, ie that interest rate rules are fundamentally unstable)

  6. I’m really impressed with the Mankiw chapter. It’s a very natural explanation of shocks and returns to equilibrium, which would be useful for many future business people.

    I’m not sure what will get covered in general, but for entry level accountants, financial analysts and consultants, the more they get ideas on what can cause fluctuations in interest rates and the yield curve the better off they are, and enough people hand-wave away financial liquidity concerns, so I’d be hesitant to not keep at least some of interest rates as liquidity preferences features of the IS/LM.

  7. Referring to Gabriel: I had 2 years classes in Macroeconomics at a Greek University (for my BSc i Economics). There is no comparison with the US textbooks. The Macroeconomics I learned there was at a theorem / proof style, i.e. consise, rigourously defined and meaningful, written by Greek professors. Calculus, linear algebra and differential equations were everywhere in the text. We had 2 years Mathematics and 1 year Numerical Approximations and Fortran. No blah-blah, no 100 pages for the obvious, no lengthy and boring stories. However, our textbooks were not fancy, not very well illustrated with many colours, were rather succint substantial and precise. Having completed a PhD in Macroeconomics, I am now teaching the Mankiw textbook. I think that this kind of education (in the US undergraduate textbook style) underestimates the intelligence of the students (I am referring to European Universities). And yes, I would agree that Calculus and Maths in general are and must be prerequisite for an Economics department which takes itself seriously. I have the impression that the new type of “Economics education” is very rich in the inssignificant and very poor in the essence. Suitable for PR types of people, with poor technical skills (because of the lack of Maths and Statistics) and unable to put their mind in the motion of an essential, creative and critical thinking.

Comments are closed.