Dynamic stochastic general equilibrium modeling (abbreviated as DSGE, or DGE, or sometimes SDGE) is a macroeconomic method which is often employed by monetary and fiscal authorities for policy analysis, explaining historical time-series data, as well as future forecasting purposes. DSGE econometric modelling applies general equilibrium theory and microeconomic principles in a tractable manner to postulate economic phenomena, such as economic growth and business cycles, as well as policy effects and market shocks.
As a practical matter, people often use the term "DSGE models" to refer to a particular class of econometric, quantitative models of business cycles or economic growth called real business cycle (RBC) models. Considered to be classically quantitative, DSGE models were initially proposed by Kydland & Prescott, and Long & Plosser; whereby Charles Plosser described RBC models as a precursor for DSGE modeling.
As mentioned in the Introduction, DSGE models constitute the predominant framework of macroeconomic analysis through their coherent combination of micro-foundations and optimising economic behaviour of rational agents. DSGE models are multi-faceted which allow for a more comprehensive analysis of macro effects, and their defining characteristics indicative through their name, are as follows:
Dynamic: The effect of current choices on future uncertainty makes the models dynamic and assigns a certain relevance to the expectations of agents in forming macroeconomic outcomes.
Stochastic: The models take into consideration the transmission of random shocks into the economy and the subsequent economic fluctuations.
General: referring to the entire economy as a whole (within the model) in that price levels and output levels are determined jointly. As opposed to a Partial equilibrium where price-levels are taken as given and only output-levels are determined within the model economy.
Equilibrium: Subscribing to the Walrasian, General Competitive Equilibrium Theory, the model captures the interaction between policy actions and subsequent behaviour of agents’.
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A macroeconomic model is an analytical tool designed to describe the operation of the problems of economy of a country or a region. These models are usually designed to examine the comparative statics and dynamics of aggregate quantities such as the total amount of goods and services produced, total income earned, the level of employment of productive resources, and the level of prices. Macroeconomic models may be logical, mathematical, and/or computational; the different types of macroeconomic models serve different purposes and have different advantages and disadvantages.
Dynamic stochastic general equilibrium modeling (abbreviated as DSGE, or DGE, or sometimes SDGE) is a macroeconomic method which is often employed by monetary and fiscal authorities for policy analysis, explaining historical time-series data, as well as future forecasting purposes. DSGE econometric modelling applies general equilibrium theory and microeconomic principles in a tractable manner to postulate economic phenomena, such as economic growth and business cycles, as well as policy effects and market shocks.
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