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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.

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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.

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