How applicable are the new Keynesian DSGE models to a typical low-income economy?
Faculty of Applied Economics
Antwerp :UA, 2011
Research paper / UA, Faculty of Applied Economics ; 2011:016
University of Antwerp
This paper assesses the applicability of new Keynesian DSGE models to low income economies similar to those in Sub Saharan Africa. To this e¤ect, we …rst review the development, criticisms and recent advances in DSGE modeling. Then we assess the implications that emanate from the assumptions of the standard small open economy New Keynesian DSGE model within the context of the economic environment of a typical low income economy. Our assessment shows the following two points. First, though there are many criticisms to these models, most recent advances seem to have addressed most of them. However, there are still some outstanding criticisms that seriously challenge not only the DSGE models but also all conventional economic models. Second, the current tendency of applying these models to explain or predict economic phenomena in low income countries without incorporating the structural speci…cities of these countries cannot be justi…ed. Instead, for these models to be helpful to understand the economic events in low income countries, most of their components must be changed or modi…ed. In this study we identify some of these components and suggest the possible changes or modi…cations.