Why DSGEs crash during crises

David F. Hendry, Grayham E. Mizon 18 June 2014

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In most aspects of their lives humans must plan forwards. They take decisions today that affect their future in complex interactions with the decisions of others. When taking such decisions, the available information is only ever a subset of the universe of past and present information, as no individual or group of individuals can be aware of all the relevant information. Hence, views or expectations about the future, relevant for their decisions, use a partial information set, formally expressed as a conditional expectation given the available information.

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Topics:  Macroeconomic policy

Tags:  crises, DSGE, law of iterated expectations

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