Dynare exercise

Monetary Economics Homework 4

Professor Sang-Sub Lee

Problem 1. a) Go through the lecture on Dynare (Introduction to dynare) (also read the Dynare UserGuide (available at the old dynare archive site ) Chapter 1-4 as needed) and then Install Dynare.

b) Run the three examples given at the end of the Dynare lecture note (Introduction to Dynare). For the first two examples (AR1 model and a simple rational expectations model), you need to create the mod files yourself by typing (or copying an pasting) the contents provided in the note. Name the files as ”AR1 example.mod” and ”RE model example.mod”, respectively, and run.

For the third example, first read the document provided in c:\dynare \4.x.x \doc \guide.pdf and use the corresponding mod file provided in the Dynare examples directory (c:\dynare \4.x.x \examples \example1.mod).

After you run these examples, examine the model outputs. Then, just confirm whether you were able to run these examples successfully. Dot not submit any output.

c) Modify ”AR1 example.mod” in a couple of ways:

c-1) In order to get the impulse responses of y in terms of % deviation (from the steady state), re-write the variable y as exp(x). This way the variable x is interpreted as the natu- ral log of y and impulse responses of x can be interpreted as % deviation (from the steady state) of y.

Specifically, do the following modifications in the mod file (the omitted parts of the pro- gram remain the same as before):

var x; varexo e; · · ·

model; exp(x)=1+alpha*exp(x(-1)) +e; end;

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initval; e=0; x=1.38; // ln(4)=1.38 end; · · · · · ·

stoch simul(order=1);

Run the model. Copy and paste the impulse response funtion graph and check if the Impulse repsonse fucntion is indeed in terms of % change. (Note that the impulse response function that Dynare plots is stored in the matlab workspace with the name of the variable (say y) followed by e, i.e.,y e .)

c-2) This time, assume the following ARMA(1,2) model instead of AR1 model:

yt = 1 + 0.75yt−1 + et + 0.5et−1 + 0.1et−2, e ∼ N(0, 1).

Create the mod file (in terms of level of y, not in terms of log level (i.e., exp(x))) for the above model and run it. Copy and paste the mod.file and the impulse response function graph.

Problem 2. The NKbaseline.mod file provided implements the baseline linearized New Keynesian model presented in Walsh (2017) Chapter 8.3.

Problem(2-1) After running the program, copy and past the impulse response functions and briefly discuss how monetary policy shock affects the variables involved. (The impulse response functions output should look like Figure 8.1 on page 336)

Problem(2-2) Change the value of omega to 0.5 and rerun the model. Copy and past the impulse response functions and briefly discuss how the change affects the impulse re- sponse functions to the monetary policy shock.

Problem(2-3) This time, change the value of ALPHA1 from 0 to 0.5 (use the original values for everything else). Rerun the model and discuss how the change affects persistence of inflation?

Problem(3) Read the article by Bernanke and Gertler (Bernanke, Ben and Mark Gertler (1995), Inside the Black Box: The Credit Channel of Monetary Policy Transmission, NBER WP #5146 (later published in The Journal of Economic Perspective Vol. 9, No. 4 (Au- tumn, 1995), pp. 27-48) and answer the following question: According to the article, what is

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the credit view of monetary policy transmission mechanism and how does it differ from the conventional view of monetary policy transmission mechanism? Discuss with the empirical evidence.

Problem(4) Read the article by Gertler and Gilchrist (Gertler, Mark, and Simon Gilchrist, 2018, What Happened: Financial Factors in the Great Recession, Journal of Economic Per- spective, Volume 32 No. 3, page 3-30.) and discuss the specific credit channels that played important roles in the propagation of Great Recession along with the empirical evidence.

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