Formulation, Estimation and Policy Analysis with DSGE Models
By Lawrence J. Christiano
Overview
The
objective is to review the basic New Keynesian model and the extensions that
are currently under development. The course
is aimed at a broad audience, including people actively doing research with
DSGE models, as well as people interested in seeing what these models are about
and what they are used for. There will be afternoon homework sessions, which
are not required to follow the lectures. The purpose of the homework sessions
is to give students hands-on experience solving, estimating and analyzing the
models discussed in lectures. We will use the software, Dynare
version 4, to do the computations, though no experience with Dynare will be assumed.
Lectures
1) The
consensus, medium sized New Keynesian (NK) DSGE
model.
2)
Introducing financial frictions
into the New Keynesian DSGE Model.
a)
Microfoundations for
the Costly State Verification (CSV) approach.
b)
Integrating CSV
into an NK model and the results of Bayesian estimation of the model using US
and EA data.
i)
The model
ii)
The importance of risk shocks.
iii) The
response of monetary policy to an increase in interest rate spreads.
c) Very
brief discussion of extending CSV to risky banking (discussion based on papers
by Zeng and
by Hirakata, Sudo and Ueda.)
3)
Financial frictions in the intermediation
sector, exposited in two-period settings (sections 3, 4, and maybe 5 of reading, handout).
a)
Two approaches based on moral hazard.
i)
Two-period version of Gertler-Kiyotaki
financial friction model, (section 3)
ii)
Hidden action (section 4)
b) Adverse selection (section 5).
4) 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.
5) Monetary policy and asset
prices. (Background
manuscript)
a) News
and inflation targeting.
b)
Using Ramsey optimal policy as a benchmark for
evaluating a policy rule.
Afternoon Sessions
Apart from
giving students hands-on experience with the quantitative analysis of models,
the two homework exercises allow us to discuss the following topics:
a)
Bayesian
estimation of DSGE models.
b)
The
HP filter as a way to estimate the output gap.
2)
The
Taylor principle (see section 3.1 of handbook chapter).
a)
The
rationale for the principle in the standard NK model.
b)
Circumstances
when things can go awry with the Taylor principle:
i)
An
important working capital channel.
ii) News shocks.
3)
The timeless perspective in Ramsey-optimal monetary policy (handout).
Introduction
to model solving with Dynare using the real business
cycle model.
(A little background on linearization as a solution
method.)
Assignment #9
This assignment
works heavily with the Clarida-Gali-Gertler model, which is developed here (for a more
detailed discussion see this
and this).
The text
for this assignment, as well as all the necessary software, is included in this
zip file.
Background readings
The main reference for New
Keynesian models is my chapter with Trabandt and Walentin, in the just-released
Handbook of Monetary Economics, edited by Friedman and Woodford.
The primary reference for financial frictions is Christiano and Daisuke, Government Policy, Credit
Markets and Economic Activity.
Other references
on financial frictions:
Bernanke, Gertler and Gilchrist’s classic 1999 paper.
Christiano, Motto, Rostagno (2003): Using the BGG model to analyze the cause of the US Great Depression, and the reason it lasted so long.
Christiano, Motto, Rostagno (2009): Using the BGG model to understand the causes of economic fluctuations in the EA and the US.
Christiano, Trabandt and Walentin (2009): Financial and labor market frictions in a small open economy model of Sweden. (Handout)
Government spending and the zero bound:
Christiano, Eichenbaum and Rebelo (JPE, 2011) When is the Government Spending Multiplier Large?