Lectures at Doug Laxton’s Workshop on Hot Topics in Macro Modeling, Washington DC, April 1-9, 2010

Financial Frictions, Unemployment and Estimation of Monetary DSGE Models

By Lawrence J. Christiano



Background reading on the basic monetary DSGE model.


In 12 hours of lectures, delivered over two days, we reviewed the following:


1. The costly state verification (CSV) model in partial equilibrium



2. Integrating CSV into a DSGE model and the results of Bayesian estimation of the model on US and EA data.



3. Alternative models of financial frictions

a. general discussion (with no handout) of CSV model with risky banking.

(Discussion based on a paper by Zeng and by Hirakata, Sudo and Ueda.)

b. Two-period financial friction model of Gertler-Kiyotaki, Handout


4. Involuntary Unemployment



5. Computer exercise.

Review of State-space/Observer representation, and Bayesian estimation.



The computer exercise illustrated the following:

    Indeterminacy under Taylor principle, when working capital channel is strong enough (see handbook chapter for detailed discussion)

    HP filter gap and actual gap negatively correlated with transitory shocks and positively correlated with persistent shocks.

    Demand-driven boom in response to optimistic expectations about the future may be associated with a drop in inflation (see handbook chapter for detailed discussion).

    Bayesian estimation of a model (see handbook chapter for detailed discussion).


Workshop participants had access to laptops with MATLAB and Dynare 4.

Computer code and background information on the exercise.

Self-extracting file that unloads the above code, as well as Dynare 4, automatically.