Factoring in Unemployment Including Unemployment Spell in a DSGE or its Enhanced Version

This approach paper proposes a refinement in the flagship macro-econometric models famously referred to as Dynamic Stochastic General Equilibrium models. These models which are used by the central banks to demystify aggregate economic phenomena, such as business cycles and the effects of monetary and fiscal policy, have become a keystone of modern macroeconomics. A case for the inclusion of unemployment including unemployment spell with a non-zero weight assigned to long-term unemployment in the DSGE models has been made in this paper. A methodology for the same has also been proposed.