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Practical DSGE modelling

Objective. To make participants sophisticated consumers' of dynamic stochastic general equilibrium models, and to provide a deeper framework and knowledge within which to frame discussions of economic policy issues.. Aims. Understanding of simple DSGE modelsAbility to solve and simulate simple

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Practical DSGE modelling

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    1. Practical DSGE modelling Alina Barnett Martin Ellison Bank of England, December 2005

    2. Objective To make participants ‘sophisticated consumers’ of dynamic stochastic general equilibrium models, and to provide a deeper framework and knowledge within which to frame discussions of economic policy issues.

    3. Aims Understanding of simple DSGE models Ability to solve and simulate simple DSGE models using MATLAB

    4. Organisation Five mornings Each morning is a mixture of small-group teaching and practical exercises using MATLAB Share of teaching is higher in first couple of days Course organisers are available each afternoon to give extra help and answer questions

    5. Outline

    6. Introduction to DSGE modelling Martin Ellison University of Warwick and CEPR Bank of England, December 2004

    7. Dynamic Stochastic General Equilibrium

    8. Dynamic

    9. Stochastic Frisch-Slutsky paradigm

    10. General equilibrium

    11. Households Maximise present discounted value of expected utility from now until infinite future, subject to budget constraint Households characterised by utility maximisation consumption smoothing

    12. Households We show household consumption behaviour in a simple two-period deterministic example with no uncertainty initial wealth W0 consumption C0 and C1 prices p0 and p1 nominal interest at rate i0 on savings from t0 to t1 Result generalises to infinite horizon stochastic problem with uncertainty

    13. Household utility

    14. Household budget constraint

    15. Household utility maximisation

    16. Households

    17. Households - intuition

    18. Firms Maximise present discounted value of expected profit from now until infinite future, subject to demand curve, nominal price rigidity and labour supply curve. Firms characterised by profit maximisation subject to nominal price rigidity

    19. Firms Firm problem is mathematically complicated (see Walsh chapter 5) We present heuristic derivation of the results

    20. Nominal price rigidity Calvo model of price rigidity

    21. Aggregate price level

    22. Derivation

    23. Optimal price setting

    24. Derivation

    25. Myopic price

    26. Full derivation

    27. Marginal cost

    28. Derivation

    29. Wages

    30. Full derivation

    31. Firms

    32. Firms - intuition

    33. Monetary authority

    34. Baseline DSGE model

    35. Next steps Introduction to MATLAB How to write the DSGE model in a format suitable for solution How to solve the DSGE model Solving the DSGE model in MATLAB

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