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A Medium
A Medium
Introduction
At its core, the medium scale DSGE model is just a real business cycle model.
The Model
- a “labor packer” that combines heterogeneous labor inputs into a homogeneous
labor input available to firms for production;
- households who consume, invest in physical capital, supply labor, make a capital
utilization decision, lease capital services to firms, set wages according to the
downward-sloping demand for their heterogeneous labor input, and accumulate
bonds;
- a final good firm that bundles heterogeneous outputs of intermediate firms into a
final output good;
- intermediate goods firms who use capital services and labor to produce
heterogeneous output goods;
- a central bank which conducts monetary policy according to a Taylor rule;
- and a fiscal authority (i.e. government) which chooses some spending exogenously
and finances this spending with a mix of lump sum taxes and debt.
Note:
- Abstract from money altogether – i.e. the economy is “cashless.”
- don’t model any usefulness of government spending.
- all government finance is via lump sum taxes.
- ignore the zero lower bound on interest rates