Some research I’ve done for the history of macroeconometric modeling conference that will be held in Utrecht next week led me to wonder who coined and disseminated the term “Dynamic Stochastic General Equilibrium.” Not the class of models, whose development since Lucas and Prescott’s 1971 paper has been the topic of tons of surveys. Fellow historian Pedro Duarte has a historical meta-survey of the flow of literature in which macroeconomists have commented on the state of macro and shaped the idea of a consensus during the 1990s and 2000s. Neither am I hunting for the many competing words used to designate the cluster of models born from the foundational papers by Robert Lucas or Finn Kydland and Ed Prescott, from Real Business Cycle to Dynamic General Equilibrium to stochastic models. What I want to get at is how the exact DSGE wording stabilized. Here is the result of a quick tentative investigation conducted with the help of JSTOR (an unreliable database for historical research) and twitter.
According to JSTOR, it was Robert King and Charles Plosser who, in their famous 1984 paper titled Real Business Cycles, used the term DSGE for the first time, though with a coma (their 1982 NBER draft did not contain the term): “Analysis of dynamic, stochastic general equilibrium models is a difficult task. One strategy for characterizing equilibrium prices and quantities is to study the planning problem for a representative agent,” they explained upon deriving equilibrium prices and quantities.
Assuming the JSTOR database is exhaustive enough (information on the exact coverage is difficult ti find) and that the term didn’t spread through books or graduate textbooks (which is a big stretch), dissemination in print was slow at first.
For more than a decade, only a handful of articles containing the word were published each year. Lars Hansen and Jim Heckman used “Dynamic Stochastic General Equilibrium” without the acronym in a 1996 JEP survey on calibration. While Hansen causally used the word in many publications throughout the 1990s, Eric Leeper, Chris Sims, Tao Zha, Robert Hall and Ben Bernanke used the word and its acronym much more agressively in a widely cited 1996 BPEA survey of advances in monetary policy research (I thank Now Here Not There for the pointer). In a telling footnote, the authors explain that “the DSGE approach is more commonly known as the real business cycle approach. But while it initially used models without nominal rigidities or any role for monetary policy, the methodology has now been extended to models that include nominal rigidities.” In other words, RBC models were being hybridized with new-keynesian insights with the hope of shaping a synthesis, and their name was evolving alongside their substance. In 1998, Francis Diebold published an article on macroeconomic forecasting, in which he moved from a descriptive to a prescriptive use of the name. DSGE was “the descriptively accurate name” for this class of models originated in Lucas 1972 with fully-articulated preferences, technologies and rules, “built on a foundation of fully-specified stochastic dynamic optimization, as opposed to reduced-form decision rules” (to avoid the Lucas critique).
I’ve been told that, by that time, the word was already in wide currency. But many other terms also circulated, and at some point the need for a new label reached a climax and competition intensified. In November 1999, the Society for Economic Dynamics published its first newsletter. In it, Stern professor David Backus explained that finding a new name for the models he, Jordi Gali, Mark Gertler, Richard Clarida, Julio Rotemberg and Mike Woodford were manipulating was much needed: “I don’t think there’s much question that RBC modeling shed its ‘R’ long ago, and the same applies to IRBC modeling. There’s been an absolute explosion of work on monetary policy, which I find really exciting. It’s amazing that we finally seem to be getting to the point where practical policy can be based on serious dynamic models, rather than reduced form IS/LM or AS/AD … So really we need a better term than RBC. Maybe you should take a poll,” Backus declared.
And indeed, Chris Edmond told me, a poll was soon organized on the QM&RBC website, curated by Christian Zimmerman. Members were presented with 7 proposals. Dynamic General Equilibrium Model (DGE) gathered 76% of votes. “Stochastic Calibrated Dynamic General Equilibrium” (SCADGE) was an alternative proposed by Julio Rotemberg, who explained that the addition of “stochastic” was meant to distinguish their models from Computational General Equilibrium. The proposal collected almost 10% of the votes. Then came Quantitative Equilibrium Model (QED, which Michael Woodford believed was a good name for the literature as a whole, though not for an individual model and Prescott liked as well), RBC, Kydland Prescott Model (KPM, which Randall Wright found “accurate and fair”), and Serious Equilibrium Model. Prescott and tim Kehoe liked the idea of having the term “applied” in the new name, Pete Summers wanted RBC for “Rather Be Calibrating” and Frank Portier suggested “Intertemporal Stochastic Laboratory Models.”
It wasn’t yet enough to stabilize a new name. Agendas underpin names, and in those years, agendas were not unified. Clarida, Gali and Gertler’s famous 1999 “Science of Monetary Policy” JEL piece used the term “Dynamic General Equilibrium” model, but they pushed the notion that the new class of models they surveyed reflected a “New Keynesian Perspective” blending nominal price rigidities with new classical models. In his 2003 magnum opus Interests and Price, Woodford eschewed DGE and DSGE labels alike in favor of the idea that his models represented a “New Neoclassical Synthesis.” It was only in 2003 that the number of published papers using the term DGSE went beyond a handful, and in 2005 that the acronym appeared in titles. I don’t know yet whether there was a late push to better publicize the “stochastic” character of the new monetary models, and if so, who was behind it. Recollections would be much appreciated here.
Have you checked central banking printed documents (WPs, policy papers, …)? I was never very interested in that, but my (imprecise) recollection is that DSGE was a label first stabilized in central banks’ research departments and then spilled to wider academic circles, where ‘Minnesotans’ (I mean, Kydland, Kehoe, Rios-Rull,…) were actively promoting the label in the early ’00s.
No, I haven’t. Thank you very much for the suggestion. There should be information in the Minnesota Fed’s publications indeed.