Macroeconomic Model - Types of Macroeconomic Models - Agent-based Computational Macroeconomic Models - Strengths and Weaknesses of DSGE and ACE Models

Strengths and Weaknesses of DSGE and ACE Models

DSGE and ACE models have different advantages and disadvantages due to their different underlying structures. DSGE models may exaggerate individual rationality and foresight, and understate the importance of heterogeneity, since the rational expectations, representative agent case remains the simplest and thus the most common type of DSGE model to solve. Also, unlike ACE models, it may be difficult to study local interactions between individual agents in DSGE models, which instead focus mostly on the way agents interact through aggregate prices. On the other hand, ACE models may exaggerate errors in individual decision-making, since the strategies assumed in ACE models may be very far from optimal choices unless the modeler is very careful. A related issue is that ACE models which start from strategies instead of preferences may remain vulnerable to the Lucas critique: a changed policy regime should generally give rise to changed strategies.

Read more about this topic:  Macroeconomic Model, Types of Macroeconomic Models, Agent-based Computational Macroeconomic Models

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