A medium-scale New Keynesian Model DSGE model

Introduction
At its core, the medium scale DSGE model is just a real business cycle model.

The features imbedded in the medium scale model:

1. Physical capital accumulation

2. Sticky prices
3. Sticky wages
4. Backward indexation of non-updated prices and wages
5. Habit formation in consumption
6. Investment adjustment costs
7. Variable capital utilization
8. A fixed cost of production
9. Monetary policy conducted according to a Taylor rule

10. The following shocks:

(a) Productivity
(b) Marginal efficiency of investment
(c) Government spending (d) Monetary policy
(e) Intertemporal preference shock
(f) Intratemporal preference shock (labor supply shock)

The parameters estimated via Bayesian Estimation

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