Lectures at the Banco Central de Reserva del Perú, March 8-12, 2010.


Formulation, Estimation and Policy Analysis with Dynamic, Stochastic General Equilibrium Models


By Lawrence J. Christiano




The objective is to convey the basic New Keynesian model and some extensions that have been developed. The course is aimed at a broad audience, including people actively doing research with DSGE models, as well as people hoping to see what these models are about and what they are used for. There will be afternoon homework sessions, which are not required to follow the material in the main lectures. The purpose of those sessions is to review the computer skills needed to implement the models discussed in lectures. In particular, we will apply the Dynare code to solve models, compute optimal policy and review the Bayesian estimation of model. The second set of handouts below review some of the material discussed in the homeworks, as well as the homeworks themselves.



Basic Lectures:


1. Construction of the consensus, medium sized New Keyneysian DSGE model.



2. Microfoundations for the Costly State Verification (CSV) Approach to Financial Frictions.



3. Introducing CSV into the Consensus New Keynesian Model



4. Introducing CSV into Small Open Economy Model (very brief)



5. Introducing Unemployment into the DSGE Model



6. The economics of Zero Bound Crisis, and Government Spending




Following are three assignments to be implemented in Dynare 4 during homework sessions:


Assignment #7

Text for distribution:




code to be placed on a subdirectory with name assignment7:





Assignment #8

Please print for distribution the pdf file contained in the following zip file. The zip file itself should be placed in a directory labeled assignment8


the following text should also be printed to paper: http://faculty.wcas.northwestern.edu/~lchrist/course/assignment8.htm


Assignment #9

The text for this assignment should be distributed in hard copy, and it is the pdf file in the following zip file:


The zip file should be placed in a folder labeled assignment#9



The following handouts are relevant to the afternoon homework sessions:


1. Review of log-linearization strategy for solving models and construction of simple NK model, from the ground up.



2. Monetary policy designed to optimize a specific objective (‘inflation targeting’)



3. Econometric methods for estimating DSGE models: state-space/observer representation, maximum likelihood, Bayesian methods, GMM



4. News about future technology, inflation targeting and stock market boom-bust cycles.




Background readings:


Discusses the estimation of the standard monetary DSGE model (relevant for lecture 1):

Christiano, Eichenbaum and Evans (2005): Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy


Evaluates previous model relative to two additional shocks, and introduces unemployment (relevant for lectures 1 and 5)

Christiano, Trabandt and Walentin (2010): Involuntary Unemployment in a Business Cycle Model


Financial Frictions (lectures 2, 3, 4):

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 for financial frictions in a simpler setting than the one in CTW.)


Government spending and the zero bound (lecture 6) 

Christiano, Eichenbaum and Rebelo (2009) When is the Government Spending Multiplier Large?