A big and embarrassing challenge to DSGE models is Alex Tabarrok’s latest post at Marginal Revolution. Tabarrok comments on a paper that finds two problems with new-Keynesian DSGE modeling. One is that this model/technique cannot predict real-world data very well. Put differently, when we ask DSGE not to forecast but to re-produce real-world data, DSGE is not very good at it. The other problem is that if data is randomly relabeled (say you swap consumption for output), DSGE forecasting may be better than using the data correctly. Embarrassing, Tabarrok concludes.