Contrasting sharply with a recent trend in DSGE modeling, we propose a business cycle model where frictions and shocks are chosen with parsimony. The model emphasizes a few labor-market frictions and shocks to monetary policy and technology. The model, estimated from U.S. quarterly postwar data,...

The paper shows how to use optimal control to compute optimal time-consistent Markovian government policies in nonlinear dynamic general equilibrium models. It extends Cohen and Michel's (1988) results for the linear-quadratic case. The method involves replacing private agents' costate variables...