Dynamic stochastic general equilibrium

Dynamic stochastic general equilibrium modeling abbreviated as DSGE, or DGE, or sometimes SDGE is a macroeconomic method which is often employed by monetary as well as fiscal authorities for policy analysis, explaining historical time-series data, as alive as future forecasting purposes. DSGE econometric modelling applies general equilibrium theory in addition to microeconomic principles in a tractable set to postulate economic phenomena, such(a) as economic growth and business cycles, as well as policy effects and market shocks.

The Lucas critique

In a 1976 paper, Robert Lucas argued that it is naive to attempt to predict the effects of a conform in economic policy entirely on the basis of relationships observed in historical data, particularly highly aggregated historical data. Lucas claimed that the decision rules of Keynesian models, such as the fiscal multiplier, cannot be considered as structural, in the sense that they cannot be invariant with respect to reshape in government policy variables, stating:

This meant that, because the parameters of the models were not structural, i.e. not indifferent to policy, they would necessarily change whenever policy was changed. The call Lucas critique followed similar criticism undertaken earlier by Ragnar Frisch, in his critique of Jan Tinbergen's 1939 book Statistical Testing of Business-Cycle Theories, where Frisch accused Tinbergen of not having discovered autonomous relations, but "coflux" relations, and by Jacob Marschak, in his 1953 contribution to the Cowles Commission Monograph, where he provided that

The Lucas critique is instance of the paradigm shift that occurred in macroeconomic view in the 1970s towards attempts at establishing micro-foundations.