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

**Overview:**

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.

http://faculty.wcas.northwestern.edu/~lchrist/course/Czech/lectureACEL_handout.pdf

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

http://faculty.wcas.northwestern.edu/~lchrist/course/Czech/csvfrictions_handout.pdf

3. Introducing CSV into the Consensus New Keynesian Model

http://faculty.wcas.northwestern.edu/~lchrist/course/Czech/AEA.pdf

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

http://faculty.wcas.northwestern.edu/~lchrist/course/Czech/CTW.pdf

5. Introducing Unemployment into the DSGE Model

http://www.faculty.econ.northwestern.edu/faculty/christiano/research/Riksbank/BOJ1.pdf

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

http://faculty.wcas.northwestern.edu/~lchrist/course/ZeroLowerBoundhandout.pdf

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

Assignment #7

Text for distribution:

http://faculty.wcas.northwestern.edu/~lchrist/course/assignment7.pdf

http://faculty.wcas.northwestern.edu/~lchrist/course/assignment7ans.pdf

http://faculty.wcas.northwestern.edu/~lchrist/course/assignment7.htm

code to be placed on a subdirectory with name assignment7:

http://faculty.wcas.northwestern.edu/~lchrist/course/rbc.zip

http://faculty.wcas.northwestern.edu/~lchrist/course/dynare4instructions.m

http://faculty.wcas.northwestern.edu/~lchrist/course/cgg.zip

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

http://faculty.wcas.northwestern.edu/~lchrist/course/assignment8ver4.zip

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:

http://faculty.wcas.northwestern.edu/~lchrist/course/assignment9ver4.zip

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.

http://faculty.wcas.northwestern.edu/~lchrist/course/solving_handout.pdf

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

http://faculty.wcas.northwestern.edu/~lchrist/course/optimalpolicyhandout.pdf

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

http://faculty.wcas.northwestern.edu/~lchrist/course/estimationhandout.pdf

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

http://faculty.wcas.northwestern.edu/~lchrist/course/presentation1.pdf

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?