It emphasizes on the significance of the models in determining the uncertain future expectations by incorporating the current macroeconomic outlook. Primarily, the general equilibrium of the model presents the connection between the agents’ behavior and policy action (25). Similarly, the comprehensive specification of the stochastic shocks contributes to the economic fluctuations that facilitate the identification of the transmission of the shocks to the economy (23). The monetary policymakers employ the dynamic stochastic general equilibrium models in conjunction with other statistical tools to determine policies quantitatively.
The main characteristic of the DSGE models is the generality in nature. The implication of the general nature of the DSGE is evident in prices and interest rates. In effect, the price and interest rate tend to adjust to the point where the supply and demand in a given market become equal. For instance, the demand of services equals the supply of the same. Similarly, the incorporation of the random components in the model is critically significant in expounding on the cyclical patterns of the economy. The common behaviors in the economy encompass shocks that affect the patterns of financial markets and adjustments in the economic production (28). In turn, the shocks influence the efficiency of production. The dynamic stochastic general equilibrium models estimate the shocks, as well as the proportions adjustments in economic activity that emanate from certain market disturbances. For instance, the models can be crucial in assisting the economists to decipher the nature of the shocks during economic downturns. Notably, the DSGE models can offer answers to the recent economic recession by determining whether the economic downturn was due to financial or fiscal shocks.
The supply and demand blocks, as well as the rate, comprise the structure of DSGE models. The central banks employ the models to ...Show more