This is a list of some of the problem assumptions within the models. Now I do not pretend to understand anything but the simplest of models. Like a cash flow projection for a farm operation. But to me, whatever models the Fed and the mainstream economists have been using, don't seem to have a great track record for predicting things. If they can not predict things, how can they be used to set policy effectively? Color me skeptical.

The list

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Let me demonstrate this. Let's take a look at a DSGE model - say, Christiano, Eichenbaum, and Evans (2005). This New Keynesian model is very similar to the Smets-Wouters model mentioned above. Here is a VERY truncated list of the assumptions necessary for this model to work:

• Production consists of many intermediate goods, produced by monopolists, and one single consumption good" that is a CES combination of all the intermediate goods.
• Firms who produce the consumption good make no profits.
• Firms rent their capital in a perfectly competitive market.
• Firms hire labor in a perfectly competitive market.
• New firms cannot enter into, or exit from, markets.
• All capital is owned by households, and firms act to maximize profits (no agency problems).
• Firms can only change their prices at random times. These times are all independent of each other, and independent of anything about the firm, and independent of anything in the wider economy. (This is "Calvo pricing". The magic entity that allows some firms to change their prices is called the "Calvo Fairy").
• The wage demanded by households is also subject to Calvo pricing (i.e. it can only be changed at random times).
• Households purchase financial securities whose payoffs depend on whether the household is able to reoptimize its wage decision or not. Because they purchase these odd financial assets, all households have the same amount of of consumption and asset holdings.
• Households derive utility from the change in their consumption, not from its level ("habit formation"). Households also don't like to work.
• Households are rational, forward-looking, and utility-maximizing.