Prototype, micro-founded DSGE models in Scilab®

Dynamic stochastic general equilibrium (DSGE) models have become increasingly popular as a policy tool in central banks in the past few years. The advantage of this approach is that the macroeconomic model is derived from microeconomic principles by spelling out the preferences, technologies and institutional framework under which economic agents interact. A major benefit is that this approach is immune to the Lucas critique, as the model's structural parameters are policy invariant. This makes DSGE models ideal tool to identify sources of fluctuations, answer questions about structural changes, forecast and predict the effect of policy changes, and perform counterfactual experiments. The aim of this Handbook is to show how to derive and simulate two prototype DSGE models. The first chapter examines the real business cycle model and the second chapter illustrate the New Keynesian model. These two frameworks are regarded as the workhorse models among practitioners, due to their simplicity and capability to address policy questions. The Handbook is written in a didactical way to enable the non-initiated reader to set up and simulate simple DSGE models. Each chapter details how to derive the model from first principles, y solving the optimising problem of each agent subject to some, well-defined, economic constraints. It then shows how to derive the long-run equilibrium of the model, how to approximate the model around its long-run equilibrium, and how to solve the model numerically. The end of each chapter shows how to implement numerical solutions in Scilab, a software freely available on the world wide web, and how to derive impulse-response functions and stochastic simulations of the model.