Notes on Business Cycle Theory from a Dynamic Stochastic General Equilibrium Perspective

Solomon, Bernard Daniel (2015): Notes on Business Cycle Theory from a Dynamic Stochastic General Equilibrium Perspective.

Abstract

These notes go over some basic aspects of the analysis of business cycles and aggregate fluctuations from a dynamic stochastic general equilibrium (DSGE) perspective. I build a canonical DSGE model with a small number of representative agents and a large set of distortionary wedges standing for various frictions as an organising framework. I use this model to discuss fundamental properties of business cycle dynamics. I start with some of the basic assumptions common to most applied DSGE models, and the modeling of household and firm behaviour. Then I discuss general equilibrium and the response of the economy to various shocks with flexible prices and wages, as well as ways of applying DSGE models with actual data. Finally I add nominal price rigidities to get the standard New Keynesian model, and discuss some open economy issues, fiscal policy and unconventional monetary policy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Business cycles, dynamic stochastic general equilibrium
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General; E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E12 - Keynes ; Keynesian ; Post-Keynesian; E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E13 - Neoclassical; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

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