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In the spotlight: Dynamic stochastic general equilibrium models for policy analysis

We use dynamic stochastic general equilibrium (DSGE) models to investigate the effects of changes in policy on economic variables. What is the effect of a tax cut on investment? By how much does output fall when interest rates rise? How should policymakers react when the price of imported energy rises? To answer these questions, we construct DSGE models describing how sectors of the economy behave and interact with each other. The answers we receive will depend on the structure of the model we create.

Stata 15's new dsge command estimates the parameters of DSGE models and provides tools for policy analysis. We can trace the effect of an unexpected shock by running irf after dsge, or we can solve the model under various parameter settings to explore how different policy regimes affect the behavior of economic variables. In my recent blog post, Dynamic stochastic general equilibrium models for policy analysis, I demonstrate how to use the dsge command to explore these kinds of policy questions.

— David Schenck
Senior Econometrician and Software Developer

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