Lectures at Doug Laxton’s Workshop on Hot Topics in Macro Modeling, Cartagena, Colombia, January 19, 2012

Nonlinearities in Macroeconomics

By Lawrence J. Christiano

Introduction

1) Overview of perturbation and projection methods for solving dynamic models (see Judd’s text book and Christiano-Fisher, JEDC, 2000).

(A more elaborate version of these lecture notes appears here.)

a) Software used to generate the graphs in the handout.

b) Dynare code, for computing impulse responses for a medium-sized New Keynesian model with the option of doing first or second order perturbations, pruning or not, etc.

2) Two general equilibrium models of banking frictions with non-linearities (sections 3, 4 of reading, handout).

a) Two-period version of Gertler-Kiyotaki financial friction model (section 3 of reading)

b) Two-period model in which bankers’ efforts cannot be observed by their creditors (section 4)

c) Sections 5 and 6 of the reading describe other financial frictions in the banking sector (adverse selection and asymmetric information and costly monitoring, but these will not be discussed.

3) Implications of the zero lower bound on the nominal rate of interest (manuscript).

a) The deflation spiral, the government spending multiplier.

b) Quantitative analysis of the role of the zero bound in the dynamics of US data, 2008 and 2009.

c) Shooting as a model-solving method.