DSGE models and central banks

Over the past 15 years there has been remarkable progress in the specication and estimation
of dynamic stochastic general equilibrium (DSGE) models. Central banks in developed and
emerging market economies have become increasingly interested in their usefulness for policy
analysis and forecasting. This paper reviews some issues and challenges surrounding the use of
these models at central banks. It recognises that they offer coherent frameworks for structuring
policy discussions. Nonetheless, they are not ready to accomplish all that is being asked of
them. First, they still need to incorporate relevant transmission mechanisms or sectors of the
economy; second, issues remain on how to empirically validate them; and finally, challenges
remain on how to effectively communicate their features and implications to policy makers and
to the public. Overall, at their current stage DSGE models have important limitations. How much
of a problem this is will depend on their specic use at central banks.