A Short Course on

Estimation, Solution and Policy Analysis using
Equilibrium Monetary Models

By

I
will discuss the construction and use of dynamic stochastic general equilibrium
(DSGE) models in the analysis of monetary policy. We will begin with the
estimation of DSGE models, with a special focus on the
role that estimated Vector Autoregressions (VAR) can
play (we will also touch on maximum likelihood and Bayesian methods for estimation).
We will discuss various features that appear in modern DSGE models: sticky
prices, sticky wages, adjustment costs in investment, a banking sector,
multiple monetary aggregates, financial frictions, and open economy
considerations. We will then discuss the application of estimated DSGE models
to the analysis of several policy questions: does a low nominal interest rate
expose the economy to special risks? What is the appropriate response of
monetary policy in the aftermath of a financial crisis? How should monetary
policy respond to the stock market? The course is targeted to a range of
people. The lectures are designed so that students who have little time outside
of class for preparation and study will see the basic ideas. In addition, a set
of homework assignments has been prepared for people who want to dig in much
deeper. The assignments give students hands-on experience estimating VARs, as
well as solving, simulating and analyzing DSGE models.

Participants
who wish to do the assignments will need a computer loaded with MATLAB 6.5 and
with Scientific Workplace (actually, the latter will only be necessary for the
second assignment). I will *not* assume
any familiarity with MATLAB or Scientific Workplace.

The
course is organized as follows:

Part
1: Vector Autoregressions. Topics: estimation of
VARs; identification of impulse response functions; confidence intervals for
impulse response functions; variance decompositions; diagnostics for VARs;
estimation results for post-war US data. (Lecture
notes).

Two Assignments -

Assignment
#1: Analysis of VARs: the impact on impulse response functions of first
differencing hours worked, and the impact of alternative choices of sample
period.

Assignment #2: Further
analysis of VARs: diagnostics for selecting lag lengths (Akaike
and other criteria, multivariate Q statistics); sensitivity to alternative
measures of population, productivity, and hours worked; alternative variance
decomposition measures.

Part
2: Introduction to the Linearization Strategy for Solving Models (Lecture
notes).

Code that goes with the
discussion in lecture of the two-sector model in Stokey-Lucas,
Chapter 6.

Assignment #3: A first stab
at solving a dynamic, general equilibrium model. Analysis of the implications
of incorporating variable capital utilization. How to handle unit roots in the
data. (Answers.)

Part
3: An Estimated Monetary General Equilibrium Model (ACEL)
(Lecture
notes).

Role of Various
Frictions: Investment Adjustment Costs, Habit Persistence, Variable Capital
Utilization

Important
Consideration: Degree of Firm-Specificity of Capital (The Degree of Market
Power in the Economy is Key to this Discussion. For Some Estimates of the
Degree of Market Power in the

Assignment
#4: Analysis of higher-dimensional dynamic general equilibrium models.
Substantively, we explore one interpretation of a bubble.

Assignment
#5: Another analysis of a higher-dimensional equilibrium model.
Substantively, we evaluate alternative hypotheses of the slow growth experience
of

Assignment #6: Replicate ACEL
Analysis, Including Robustness to Assumptions.

Part
4: Evaluating Recent Criticisms of VARs. (A preliminary manuscript.)

Part 5:
Introducing Financial Frictions and a Banking Sector Into
Analysis (Christiano-Motto-Rostagno), Estimation by
Maximum Likelihood Methods (Lecture
notes).

Analysis
of US Great Depression

Estimation
Results for US and Euro Area (Notes Will be Posted Later)

Analysis
of the Monetary Policy and Stock Market Bubbles

Part 6: Other Monetary Policy Issues

The Inflation
Take-Off of the 1970s. Notes.

Optimal Monetary Policy in a Sudden Stop (Lecture notes)

Monetary Policy and a Bubble. (See assignment #4 and Notes)

Implications for Policy of the Zero Lower Bound on Interest Rates.