Rethinking Business Cycle Models – Workshop at the MNB

‘DSGE Models: A Closer Look at the Workhorse of Macroeconomics’ was the title of the international workshop organised for the 8th time by the Magyar Nemzeti Bank (MNB) jointly with the London-based Center for Economic Policy Research on 3-4 September 2009. The recent sub-prime debacle, the resulting financial meltdown and the substantial policy responses gave the topicality of the event; even more so as the unexpected extent of the crisis stirred a heated debate within and outside the economics profession about the applicability and usefulness of the current business cycle models.2 The keynote speakers of the event were professors Lawrence Christiano (Northwestern University) and Mark Gertler (New York University, NYU), who are both world-renowned for their essential and continuing contributions to the development of the current versions of business cycle models. The keynote speakers with the 15 presenters from 10 countries and their discussants provided important attempts to challenge or defend basic assumptons of the models (e.g. sticky developments in prices or rational and forward-looking expectations); argue for adding long missing factors (e.g. an explicit financial sector and imperfect credit markets) to the models, or for dropping others (e.g. money-demand) which seem non-essential. There was general agreement among the participants with Governor of the MNB András Simor, who said that in the current crisis ‘we need [models of business cycles] more than ever,’ but they need to be developed further to be able to analyse and quantify factors that the current crisis showed essential.