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Review of Economic Perspectives

Národohospodárský obzor; The Journal of Masaryk University

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Volume 14, Issue 2 (Jun 2014)

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Some Notes on Historical, Theoretical, and Empirical Background of DSGE Models

Martin Slanicay
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  • Masaryk University, Faculty of Economics and Administration, Department of Economics, Lipová 41a, Brno 602 00
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Published Online: 2014-07-10 | DOI: https://doi.org/10.2478/revecp-2014-0008

Abstract

In this paper I present the historical, theoretical and empirical background of DSGE models. I show that the fundament of these models lies in optimizing agents framework and argue which impulses fueled the development of DSGE models. I demonstrate the evolution of DSGE models with an accent on the role and effects of the monetary policy, using distinction between RBC models and New Keynesian models. I explain the paradigm shift from the RBC models to the New Keynesian models by pointing out the main pitfalls of the RBC models and showing how adding nominal rigidities to the otherwise standard RBC models enhances empirical properties of these models. I also discuss how nominal rigidities are modeled in New Keynesian DSGE models and what the pros and cons of different approaches are. Finally, I review the most important New Keynesian theories of nominal rigidities and some of the empirical evidence on price and wage rigidities

Keywords: DSGE model; RBC; New Keynesian; monetary policy; business cycle; price rigidity; wage rigidity

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About the article

Published Online: 2014-07-10

Published in Print: 2014-06-01


Citation Information: Review of Economic Perspectives, ISSN (Online) 1804-1663, DOI: https://doi.org/10.2478/revecp-2014-0008.

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© by Martin Slanicay. This article is distributed under the terms of the Creative Commons Attribution Non-Commercial License, which permits unrestricted non-commercial use, distribution, and reproduction in any medium, provided the original work is properly cited. BY-NC-ND 3.0

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