Analysis and Solution of the New Keynesian Model
By Lawrence J. Christiano
We will develop the New Keynesian (NK) model from its foundations and discuss model solution methods. Computer exercises will be used to study properties of NK models and obtain experience using Dynare. The applications will focus on the NK model’s implication that the economy may suffer from excess or insufficient aggregate demand.
Lectures and
Handouts
Introductory
remarks.
1)
Solving and simulating DSGE models (software used to generate the graphs in the
handout…not part of the course requirement).
a)
Review
of perturbation and projection methods for solving models.
b)
Simulating
solutions based on higher-order perturbations: pruning (a zip
file that uses Dynare to do some of the computations).
i)
Dynare
code,
for computing impulse responses in a medium-sized New Keynesian model with the
option of doing first or second order perturbations, pruning, or not, etc. (not
part of the course requirement).
c) Deeper discussion
of first order perturbation (connection to Blanchard-Kahn conditions, sunspots,
others exotic things).
d)
Readings: Judd’s
textbook (perturbation and projection); Christiano-Fisher (JEDC,2000)
(projection); Kim-Kim-Schaumburg-Sims(JEDC, 2008) (pruning); den Haan-de Wind (2009) (perturbation and projection); Lombardo (2011)
(perturbation).
2)
Foundations of the New Keynesian
model (handout#1
and handout#2).
Background: handbook chapter.
a)
The
linearized Phillips curve.
b) Solving the model by
linearization.
c) Assignment #9,
question 1, accomplishes three things.
i) Gives students experience with Dynare
for solving and simulating models.
ii) Gets to the heart of the New
Keynesian models by exploring its basic underlying economic principles.
iii) Shows how ‘news’ shocks might cause
an inflation targeter to drive the interest rate in
the ‘wrong’ direction and inadvertently trigger an inefficient stock market boom
(Slides,
manuscript;
and section 3.2 of handbook
chapter.) Also shows how the Taylor
rule can be too weak
in its response to more conventional shocks.
d) Other,
related materials.
3) Financial Frictions in a New Keynesian model.
a)
Micro foundations for
Costly State Verification (CSV) approach (zip file with code for the computations, and a version of the slides with more extensive derivations).
b)
Integrating CSV into a New Keynesian model and the results of Bayesian
estimation of the model using US data (CMR,
JMCB
2003, AER 2014).