August 11, 2009

Towards a DSGE model for policy analysis in the Netherlands

We present a small-open-economy Dynamic Stochastic General Equilibrium model with distortionary taxation.

The model has an overlapping generations structure with fully optimising agents following Blanchard (1985). Firms are monopolistically competitive and are subject to sticky prices. We also include capital and foreign bond adjustment costs.

In this paper a DSGE model is described. The focus of the current version of the model is to get an idea of the potential of DSGE models for CPB. To that end, the current model is a small-open economy model of an economy with distortionary taxes and nominal rigidities.

The remainder of this memo proceeds as follows. Section 2 describes the model. Section 3 presents some model simulations and Section 4 concludes. The complete set of model equations is given in the Appendix.