- Set up of the economic model.
- Derivation of the first-order equilibrium conditions. Together with the structural equations, these build a system of non-linear stochastic difference equations.
- As this system usually does not have a closed analytical solution, the solution is approximated in the neighborhood of a given point, in most cases the non-stochastic steady state.
- Either (log-)linear approximation around the steady-state leading to a system of linear difference equations in state-space form and solution of this system with the help of the usual procedures or second (or higher) order approximation around the steady-state.
- Calibration of the parameters or estimation of parameters or both.
- Calculation of variances and conducting a variance decomposition of the underlying shocks and impulse response functions of the variables of interest.
- Evaluation of the model by looking at measures of fit to the data."
Extracted from Flotho (2009): DSGE Models - solution strategies
