A Simplified Illustration of Numerical Solution Methods of DSGE Models with DYNARE Software

Blanchard-Kahn’s procedure for the solution of real business cycle (RBC) models is powerful and elegant, but it has evident limits: it requires a lot of calculations, which for more complex models make it substantially inapplicable. For these reasons, economic theory has moved toward numerical calculus. This chapter considers the numerical solution method contained in the DYNARE software by exposing the writing of the DSGE model code in a simplified way. In Sect. 4.4, there is a detailed comment on DYNARE’s numerical simulation of the model of the centralized economy in level form, with a flexible labor supply. This chapter continues by examining the model of the centralized economy in (log) linear form and alternative ways of encoding the model. A complete DYNARE code of the log-linearized model with public expenditure is also considered. After a note on CALIBRATION, a detailed discussion of different ways for calculating the steady state in DYNARE concludes the chapter.