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Recent Developments in DSGE Modelling: Beyond FIRE

Paul Levine, Joseph Pearlman, Bo Yang Orcid Logo, Son Pham

South Asian Journal of Macroeconomics and Public Finance, Volume: 14, Issue: 1, Pages: 11 - 43

Swansea University Author: Bo Yang Orcid Logo

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DOI (Published version): 10.1177/22779787251343477

Abstract

This survey focuses on the standard assumption in DSGE models: rational expectations (RE) with perfect information (PI) aka full information (FI)—hence FIRE. RE means model consistent expectations—agents be they households, firms, banks or policymakers know your model. PI (or FI) means agents observ...

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Published in: South Asian Journal of Macroeconomics and Public Finance
ISSN: 2277-9787 2321-0273
Published: SAGE Publications 2025
Online Access: Check full text

URI: https://cronfa.swan.ac.uk/Record/cronfa69864
Abstract: This survey focuses on the standard assumption in DSGE models: rational expectations (RE) with perfect information (PI) aka full information (FI)—hence FIRE. RE means model consistent expectations—agents be they households, firms, banks or policymakers know your model. PI (or FI) means agents observe or can infer the current and past state variables in your model. RE + PI (or FIRE) is a strong assumption. The purpose of this survey is to examine the literature that relaxes RE or PI or both. This is relevant for DSGE models in general, but particularly so for the efficacy of monetary policy in a New Keynesian environment when the expectation by agents of future policy is of crucial importance.
Keywords: Behavioural macroeconomics; imperfect information; heterogeneous expectations
College: Faculty of Humanities and Social Sciences
Funders: The authors received no financial support for the research, authorship and/or publication of this article.
Issue: 1
Start Page: 11
End Page: 43

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