Dynamic stochastic general equilibrium . . . You've GOT to be Kidding!

Mr. [Wolfgang] Munchau ...is ...explaining about "New Keynesianism" which is, "in fact, probably the most influential macroeconomic theory of our time. At the heart of the doctrine stands the so-called dynamic stochastic general equilibrium model, nowadays the main analytical tool of central banks all over the world."... "In this model, money and credit play no direct role. Nor does the financial market. The model's technical features ensure that financial markets have no economic consequences in the long run."... Almost as an understatement, he says, "This model has significant policy implications."... "One of them," he goes on, "is that central banks can safely ignore monetary aggregates and credit. They should also ignore asset prices and deal only with the economic consequences of an asset price bust."... Then he hits me between the eyes with the sledgehammer of, "They should also ignore headline inflation"... he cautiously suggests, ever the gentleman, that "we might want to question whether the recipes that got us into this mess are also most suited to get us out again."... He sums up by saying... "a recession is not the worst possible outcome. The worst is for this crisis to go on and on, for Minsky's moment to become an eternity."... Government Sanctioned Ponzi Schemes, The Mogambo Guru

So, let's see, according to "the dynamic stochastic general equilibrium model, ...the main analytical tool of central banks all over the world," the organizations (central banks), who are supposed to regulate money and credit "can safely ignore monetary aggregates and credit."

And these same central banks, expected to stabilize the markets and keep inflation under control, operate on the premise that "money and credit play no direct role. Nor does the financial market." And so, in pursuing their "mandate," they "also ignore headline inflation."

The economics profession has neglected to take human psychology into consideration. I've written a book, "Animal Spirits," to try to remedy that situation. --Yale economist and co-inventor of the Case-Shiller housing index Robert Shiller, CNBC, January 12, 2010, 09:53:39