Knowra Dynamic stochastic general equilibrium Dynamic stochastic general equilibrium Dynamic stochastic general equilibrium (DSGE) models describe economies in which forward-looking agents make choices over time under uncertainty, with outcomes determined by market clearing or specified frictions.
Rational expectations : A modeling assumption that agents’ forecasts use available information consistently with the model’s structure. DSGE agents form expectations about future prices and policy when choosing today.
Representative agent : A simplified agent whose choices stand in for those of many individuals in an economy. Many DSGE models aggregate household behavior through one representative household.
Real business cycle theory : A theory explaining business-cycle fluctuations largely through real shocks and optimizing agents. Real business cycle models supplied influential dynamic, stochastic equilibrium methods.
Keynesian economics : A macroeconomic tradition emphasizing aggregate demand, output fluctuations, and roles for stabilization policy. Its historical versions often relied less on explicit optimizing agents and model-consistent expectations.
Monetary policy : Central-bank actions that influence money, credit, interest rates, or economic conditions. DSGE models compare policy rules and trace their effects on inflation and output.
Intertemporal choice : Decision-making that weighs costs and benefits across different points in time. Household consumption and firm investment link current decisions to expected future conditions.
Utility function : A function that ranks outcomes according to an agent’s preferences. Household objectives specify how consumption, leisure, and other outcomes are valued.
New classical macroeconomics : A school of macroeconomics emphasizing rational expectations and market-clearing analysis. Its expectations and equilibrium foundations shaped early DSGE modeling.
Econometric model : A statistical representation of economic relationships estimated from observed data. Traditional large-scale econometric models often specify equations differently from structural DSGE systems.
Fiscal policy : Government decisions about spending, taxation, and borrowing. Fiscal DSGE models analyze how public budgets interact with households, firms, and economic activity.
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