Other Material
Related to the Analysis of the New Keynesian Model

1. Assignment #9,
question 1, accomplishes two things.

a. Gives students experience with Dynare
for solving and simulating models.

b.
Gets to the heart
of the New Keynesian models by exploring its basic underlying principles.

2. Solving and analyzing models using the linearization
strategy in Dynare.

a.
A simplified
discussion of the solution to linear expectational
difference equations that we explore with Dynare
appears in the class handout.
An evaluation of that solution from the perspective of all possible solutions
to a linear expectational difference equation appears
here.

3. Implications of Assignment #9 for inflation targeting.

a. The rationale for, and possible pitfalls of, the
Taylor principle/inflation targeting. Pitfalls will be shown to be possible if
there is a significant working capital channel or if ‘news’ shocks are
important (see this manuscript
for further discussion).

b.
The optimality of
using the natural rate of interest (especially if news shocks are important) to
guide policy, and identifying measurable proxies for it (see background manuscript).

4. Extensions not discussed formally in
class:

a. Code for exploring different versions of the NK model
and investigating, for example, the relative performance of first and second
order perturbation methods for model solution. Here is a simple (no capital,
closed economy) NK economy with Rotemberg price
adjustment costs. Here is a simple NK economy
with Calvo price adjustment. Here is code for
analyzing a medium-sized NK model.

b. An alternative to perturbation for solving models is
called *the extended path method*,
which – like the perturbation method – has been incorporated into Dynare. A discussion of that method for doing stochastic
simulation appears here. Two examples, based on the simple NK
model without capital, are considered. In each case, the zero lower bound on
the interest rate is binding. One case considers the economic effects of a
positive technology shock. The other case considers the welfare and other
effects of a government spending shock when it must be financed by
distortionary taxes and the government’s intertemporal
budget constraint must be satisfied.

c.
Using linearized
DSGE models to simulate a fixed interest rate path,
either because the zero lower bound is binding or as input to a policy briefing
(code).

d.
A more extensive
discussion of Ramsey optimal policy appears here.
Possible time inconsistency of monetary policy and the timeless perspective are
discussed. The implications of the working capital channel (briefly discussed
in assignment 9) are reviewed.

5. Exploring the meaning of the
fact that money demand and supply are not included standard presentations of
the NK model.