Teaching DSGE models to undergraduates

Abstract

This paper puts forward a systematic approach to teaching simple dynamic stochastic general equilibrium (DSGE) models toundergraduates. It proceeds in the following way: first, the structural model of the economy, which includes the households’ andfirms’ problems, is presented and progressively solved. We then find the steady state and log-linearized equations of the model.Next, a productivity shock is simulated on the computer so as to tell a “story” about how the economy behaves. Finally, the modelis extended by including the government and the foreign sector. We reckon instructors of macroeconomics will find this path usefulin teaching their undergraduate students the basics of DSGE models.