Questions on the model with trend

Dear Professor Pfeifer,

I’m a little confused on the dsge model with trend. Is it necessary to add trend in every dsge model ? Under what conditions should we add trend in the model ? Can I just solve the model without trend and get general results ?

Any reply will be appreciated. Thank you very much.

Hi jamess,

you should have a look at Pfeifer_2013_Observation_Equations.pdf - Google Drive

Long story short, as long as you consider a stationary concept like the fluctuations around the balanced growth path you don’t need to model the trend explicitly.