Dynamic stochastic general equilibrium
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...
. The DSGE methodology attempts to explain aggregate economic phenomena, such as economic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...
, business cycles, and the effects of monetary
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
and fiscal policy
In economics and political science, fiscal policy is the use of government expenditure and revenue collection to influence the economy....
, on the basis of macroeconomic models derived from microeconomic principles
In economics, the term microfoundations refers to the microeconomic analysis of the behavior of individual agents such as households or firms that underpins a macroeconomic theory....
. One of the main reasons macroeconomists seek to build microfounded models is that, unlike more traditional macroeconometric forecasting models
Large-scale macroeconometric model
Following the development of Keynesian economics, applied economics began developing forecasting models based on economic data including national income and product accounting data. In contrast with typical textbook models, these large-scale macroeconometric models used large amounts of data and...
, microfounded models should not, in principle, be vulnerable to the Lucas critique
The Lucas critique, named for Robert Lucas′ work on macroeconomic policymaking, argues that it is naïve to try to predict the effects of a change in economic policy entirely on the basis of relationships observed in historical data, especially highly aggregated historical data.The basic idea...