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

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.