A Neo-Classical Benchmark Economy

In these notes, we discuss a dynamic stochastic general equilibrium (DSGE) economy with complete markets. This model serves as a useful benchmark and point of departure for many questions in macroeconomics. It also serves as a simple first pass at a positive model of business cycles or asset pricing in closedand open-economy contexts. You should familiarize yourself with all the salient features and results of this model. On the quantitative side, much of the modern research on quantitative business cycle models is based on departures from this benchmark that seek to improve the models ability to account for the data. On the theoretical side, this model provides a useful backdrop for much of the recent work on the effects of frictions for macroeconomic outcomes, the role of heterogeneity, and the optimal design of public policy.