New Keynesian DSGE Models
After the pioneering work, surveyed in the Mankiw and Romer volumes, on what types of microeconomic ingredients might produce Keynesian macroeconomic effects, economists began putting these pieces together to construct macroeconomic models. These models describe the decisions of households, monopolistically competitive firms, the government or central bank, and sometimes other economic agents. The monopolistic firms are assumed to face some type of price stickiness, so each time firms adjust their prices, they must bear in mind that those prices are likely to remain fixed longer than they would like. Many models assume wages are rigid too. Total output is determined by households' purchases, which depend on the prices of the firms. Since macroeconomic behavior is derived from the interaction of the decisions of all these players, acting over time, in the face of uncertainty about future conditions, these models are classified as dynamic stochastic general equilibrium (DSGE) models. The parameters of the model are usually estimated or chosen to make the model's dynamics resemble the actual macroeconomic data from the country or region under study. This modeling methodology is surveyed in Woodford (2003), op. cit.
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