Dynamic Stochastic General Equilibrium Models

Theory-based macroeconomic forecasting and policy analysis has largely relied in recent years on (calibrated) Dynamic Stochastic General Equilibrium (DSGE) models. In particular, most policy relevant institutions, such as central banks or the International Monetary Fund (IMF) rely on DSGE models, for example the ‘Global Economy Model (GEM)’ used by the IMF (Bayoumi, 2004). The majority of the recent contributions in this area rely on New Keynesian monetary models.

DSGE models are based on the concept of rational representative agents whose behaviour is derived from their preferences and technologies by solving inter-temporal optimization problems. A number of different types of frictions and rigidities have been introduced in parts of the model such as the labour or the financial markets. Forecasting in this framework is typically based on Bayesian estimation of the model using time series of macroeconomic quantities such as output, consumption, investment, wages, inflation and interest rates (Smets and Wouters (2003), see Del Negro and Schorfheide (2012) for a recent survey).

Related terms: Economic Theories, Econometrics, Econometric Modelling, Forecasting, Macroeconomic Models, Macro-Simulation, Policy Modelling


Bayoumi, T. (2004), GEM: A New International Macroeconomic Model, Occasional Paper 239, International Monetary Fund

Del Negro, M. and F. Schorfheide (2012), “DSGE Model-Based Forecasting”, Staff Report No. 554, Federal Reserve Bank of New York.

Smets, F. and R. Wouters (2003), “An Estimated Dynamic Stochastic General Equilibrium Model”, Journal of the European Economic Association, 1, 1123-1175

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