Abstract
The paper examines the theoretical issues in DSGE Models. Reviewing relevant literature, it was observed that DSGE models are based on micro-founded and real business cycle models with theories of nominal frictions. The paper concludes that much of the development of the model in literature and policy circles, including central banks, focuses on the responses of macroeconomic variables to shocks and forecasting. Finally, the paper recommends the need to advance the DSGE model to capture movements in medium-term shocks and dynamics related to parameters like socio-economic, output, and unconventional monetary policies. These modifications would make the DSGE model more suitable for addressing the key issues confronting policymakers.
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