ABSTRACT
Despite the popularity of rational expectations dynamic stochastic general equilibrium (DSGE) models in academic and policy-oriented institutions, the new Keynesian approach (that is built upon this framework) features a variety of known theoretical and empirical shortcomings such as dynamic inconsistencies (Estrella and Fuhrer 2002) of rational expectations models as well as the ambiguous empirical evidence on the rational expectations forward-looking term in the Phillips curve (Rudd and Whelan 2005; Galí et al. 2005), which raises the question whether it indeed should be used as the standard workhorse in macroeconometric policy analysis.
