A Universidade do Banco Central realizará, em conjunto com o CEMLA, o curso Estimation, Solution and Policy Analysis using Equilibrium Monetary Models, em Brasília/DF, no período de 23 a 27 de março de 2009, nas dependências da UniBacen.

O objetivo do curso é prover os participantes dos conhecimentos necessários para a construção e uso de modelos DSGE (Dynamic Stochastic General Equilibrium) nas análises de política monetária.

O facilitador será o prof. Lawrence J. Christiano.

Os requisitos necessários são:
Domínio no idioma inglês (nível avançado).

Compatibilidade do conteúdo programático com as atividades do servidor, sendo que no momento da inscrição dever-se-á mencionar o tempo de experiência na área e a sua titulação (mestrado, doutorado, etc…).

São oferecidas 15 vagas para o BNDES e órgãos externos. Interessados contactar mauriciodavid@bndes.gov.br ^[1]

Conteúdo programático:

A Short Course on Estimation, Solution and Policy Analysis using Equilibrium Monetary Models

By Lawrence J. Christiano

I will discuss the construction and use of dynamic stochastic general equilibrium (DSGE) models in the

analysis of monetary policy. We review the solution and estimation of DSGE models. We will review the

use of maximum likelihood and Bayesian estimation methods, methods that make use of estimated Vector

Autoregressions (VAR), as well as methods based on single equation 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, search and matching models of

unemployment and open economy considerations. We will then review the use of estimated DSGE models

in the formulation of monetary policy. Here, we will focus on the operating characteristics of monetary

policy rules as well as the implementation of Ramsey-optimal monetary policy. The notes below review

additional particular 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 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: Introduction to the linearization strategy for solving and estimating models, and for

deducing the implications of models for optimal monetary policy

• Simple examples, based on the RBC model and the Clarida-Gali-Gertler new-Keynesian (‘basic’)

(lecture notes).

1. Code that goes with the discussion in example #1 in the lecture notes of the two-sector model

in Stokey-Lucas, Chapter 6.

2. Code that goes with the discussion of example #5 in the lecture notes.

3. Code for other examples in the lecture notes.

4. 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.)

5. Assignment #7: Uses Dynare to solve the models in examples #3 and #5 in the lecture notes.

• Extensions of the basic model to the open economy, to include search and matching in the

labor market and to include financial frictions (code used in the calculations in part one of

these notes…..uses Dynare, version 3.)

• Ramsey-optimal monetary policy (here, we only consider optimal monetary policy when there

are lump-sum taxes. For a broader overview of the analysis of Ramsey policy, see Part 5

below).

• Assignment #8: Uses Dynare to compute optimal monetary policy in example #3 (the

Rotemberg sticky price model) of the lecture notes on Ramsey-optimal policy. The assignment

shows that optimal monetary policy is sensitive to how distortions in the labor market are

treated. For additional discussion and code for optimal monetary policy, see.

• Estimation methods covered include matching VAR impulse response functions, maximum

likelihood and Bayesian maximum likelihood.

1. 1. Assignment #9: Uses Dynare version 4 to (i) estimate the parameters of a model by

maximum likelihood and/or Bayesian methods, (ii) estimate unobserved variables like

the output gap; (iii) compute forecasts and forecast uncertainty. The assignment devotes

a special effort to understanding the MCMC algorithm, because analysis of the

posterior distribution of parameters is central to Bayesian inference and the MCMC

algorithm is the standard tool for approximating that.

• Part 2: Bayesian estimation of a model for US aggregate data and implications for monetary

policy (handout).

•This is an application of all the issues discussed in part 1. In addition,

1. 1. We specify a model of technology in which signals about technology movements

arrive in advance. We then estimate the model in US data.

2. 2. Based on the estimated model, we argue that monetary policy may inadvertently

have played a role in stock market boom-busts.

• Part 3: Vector Autoregressions. Topics: estimation of VAR’s; identification of impulse response

functions; confidence intervals for impulse response functions; variance decompositions; diagnostics

for VARs; estimation results for post-war US data; decomposition of historical data into shocks.

(Lecture notes).

• For a recent debate about VARs, one that we will probably not have time to discuss, see.

• 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 4: An Estimated Monetary General Equilibrium Model (CEE, ACEL) (Lecture notes).

• This lecture stresses the value of VARs as a source of guidance for constructing general

equilibrium models. An alternative strategy is proposed by CKM. For a discussion and

evaluation, see.

• 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 US Economy, See Bowman.)

• Assignment #4: Analysis of higher-dimensional dynamic general equilibrium models.

Substantively, we explore one interpretation of a ‘bubble’ (code).

• Assignment #5: Another analysis of a higher-dimensional equilibrium model. Substantively,

we evaluate alternative hypotheses of the slow growth experience of Japan in the 1990s.

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

• Extension of CEE model to incorporate financial frictions and a banking sector (Christiano,

Motto, Rostagno, 2003, 2007).

• Extension of CEE model to incorporate labor market search (Christiano, Ilut, Motto and

Rostagno, 2007).

• Extension of CEE model to small open economy (Adolfson, Laseen, Linde, Villani (2007))

• Extension of CEE model to small open economy, and to include financial frictions and search

and matching in the labor market (Christiano-Trabandt-Walentin (2007))

• A more recent version of the lecture notes, which places some stress on extensions to financial

frictions.

• Part 5: Optimal monetary and fiscal policy (lecture notes).

• Here we address monetary policy in the plausible scenario that there are no lump sum taxes.

We consider environments where all taxes distort some margin, such as labor or capital

investment. This requires being explicit about the array of taxes available to the fiscal

authorities and casting the optimal policy problem within the context of a single intertemporal

government budget constraint. We start with the most basic question: ‘what is the optimal

monetary policy?’ To make the discussion interesting, we present it in the context of a debate

that occurred between Milton Friedman and Edmund Phelps. The former argued that optimal

monetary policy sets the nominal rate of interest to zero, to minimize the distortions associated

with economizing on cash balances. The latter argued that this conclusion does not hold up

when account is taken of the fact that the government must finance its expenditures with

distorting taxes. In an environment like this, argued Phelps, it is desirable to spread distortions

over many different economic decisions, including the decision to hold money. Phelps

suggested this would involve some inflation and, hence, positive nominal interest rates. We

will address the Friedman-Phelps debate using the tools of public finance, by taking the primal

approach to the study of Ramsey equilibria. We will do so in a model economy (the Lucas-

Stokey cash-credit good model) that incorporates the features emphasized by both Friedman

and Phelps in their debate. This model does not incorporate sticky prices. We will also review

the implications for optimal monetary policy of price-setting frictions. Finally, we will relate

the present discussion of optimal monetary policy to the discussion in part I of this course,

where we did not have to worry about the government’s intertemporal budget constraint. This

is because, implicitly, that discussion assumed the presence of lump sum taxes. Some readings

on the analysis of part 5 of the course can be found here. Item 1 in these readings is the most

relevant for this course.

• Part 6: The operating characteristics of simple policy rules.

• We will analyze the operating characteristics of alternative monetary policy rules, without

modeling explicitly the optimization problem of the monetary authority. We will in particular

emphasize the recent literature on Taylor rules. This is a monetary policy strategy under which

the monetary authority raises the interest rate when expected inflation is high, and reduces it

when it is low. We will discuss the reasons why people have proposed this rule, as well as

some of the pathologies associated with it. For example, we will explore the argument that a

Taylor rule which assigns insufficient weight to inflation laid the groundwork for the ‘Great

Inflation’ of the 1970s. We will also explore the possibility that a Taylor rule which assigns too

much weight to inflation may inadvertently contribute to a stock market boom-bust cycle such

at the ones experienced in the US in the 1920s or the 1990s. We will explore the idea that a

policy of monitoring the monetary aggregates may reduce the likelihood of pathologies

associated with the Taylor rule. We will explore the idea that a commitment to low inflation

could, in conjunction with the zero lower-bound on the nominal interest rate, expose the

economy to falling into a ‘liquidity trap’. Finally, time permitting we will explore the

relationship between monetary policy and a stockmarket boom-bust cycle.

• lecture notes on 1970s and Taylor rule pathologies (Readings); lecture notes on boom-bust

cycle (see Assignment #4); Implications for Policy of the Zero Lower Bound on Interest Rates

(lecture notes).

• Part 7: Monetary policy in a financial crisis.

• Considerable attention has been given to the appropriate monetary policy in a ‘Sudden Stop’.

These are financial crises experienced by several emerging market economies in which

domestic output and employment collapse and the current account swings sharply from

negative to positive. We will review one model of a ‘Sudden Stop’, according to which it is

triggered by a tightening of collateral constraints on foreign borrowing. The economic collapse

is brought on by the resulting inability to finance crucial foreign intermediate inputs. The

monetary policy question is how best to set the domestic nominal interest rate under these

circumstances. In practice, countries in a ‘Sudden Stop’ initially raise the domestic interest rate

sharply, and then reduce it. We will explore what features of the environment make such

policy optimal. At a technical level, the analysis will expose the student to a standard small

open economy model with a traded and non-traded goods sector. In addition, we will discuss

how the presence of binding collateral constraints may profoundly affect the nature of the

monetary transmission mechanism.

• Optimal Monetary Policy in a ‘Sudden Stop’ (Lecture notes)