Like a Good Neighbor: The Importance of Non-Linearities and Expectations in the Recent Crisis

Abstract

This commentary is motivated by the papers “Unconventional Monetary Policy and the Great Recession: Estimating the Macroeconomic Effects of a Spread Compression at the Zero Lower Bound” by Christiane Baumeister and Luca Benati (this issue) and “House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macroprudential Policy” by Paolo Gelain, Kevin J. Lansing, and Caterina Mendicino (this issue). Both papers are innovative technically, but because they are trying to capture difficult phenomena, they illustrate nicely the limits of current DSGE modeling. I focus my comments on two issues in which macro modeling needs improvement: the modeling of expectations and non-linearities.