Practical DSGE modelling

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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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