This chapter modifies the baseline DSGE model in three dimensions. First, it replaces the AR processes for technology growth and government spending by a VAR process, generalizing the law of motion of the exogenous shocks to make the DSGE model specification more flexible and improve its fit. Second, the chapter adds capital as a factor of production to the baseline New Keynesian DSGE model and includes nominal wage stickiness as well as other forms of rigidities. Finally, it considers a DSGE model that is designed to analyze fiscal as opposed to monetary policy. This model abstracts from nominal rigidities and instead focuses on fiscal policy rules that determine the level of government spending and taxation as a function of the state of the economy.
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