The small signal model is the basis of microgrid parameter optimization, which usually employs a simplified transfer function model to conduct research. However, the small signal model of Distributed Generation (DG) based on power regulation has time delay problems, especially the inherent time delay of the inverter’s power response namely PWM delay and the acquisition delay of digital circuits. Therefore, differing from the traditional microgrid parameter optimization, a small signal model with time delay effect is established for the microgrid parameter optimization. By comparing the method with time delay considered and the traditional method, the different effects upon the system stability of different parameters are revealed, and the microgrid parameter optimization with time delay system is proposed. With simulations conducted upon the parallel islanded microgrid system with 2 DGs, the characteristic differences of systems are compared and the rationality and superiority of the proposed method is verified. This work is supported by National Natural Science Foundation of China (No. 61663019) and Science and Technology Project of State Grid Gansu Electric Power Company (No. 522722160021).