The New Keynesian DSGE model is underpinned by three fundamental equations, each crucial for understanding macroeconomic dynamics. Firstly, the Phillips curve embodies the trade-off between inflation and real economic activity, capturing how changes in economic output affect price levels. Secondly, the IS curve depicts the relationship between output and interest rates, reflecting the equilibrium in the goods market and the impact of monetary policy on economic activity. Lastly, the Taylor rule outlines the central bank’s reaction function, dictating how it adjusts the nominal interest rate in response to deviations of inflation from its target and output from its potential.

Mastery of these equations is paramount for grasping the intricate interplay between monetary policy, inflation dynamics, and output fluctuations, providing a solid foundation for analyzing economic phenomena and guiding policy prescriptions. In this tutorial, we will discuss the three equations that define the canonical model. At the end of the tutorial, you will find a link to access the complete material in Matlab-Dynare. Through this package, individuals will gain comprehensive insights into these equations, learning not only how to estimate them in Matlab-Dynare but also how their variables and parameters influence one another, facilitating a deeper understanding of macroeconomic theory and practice.