Using MoPoS in the Classroom. Yvan Lengwiler WWZ, Economic Theory University of Basel, Switzerland. 2½ learning aims. 1) MoPoS aims at providing a complement to the usual curve shifting exercises.
WWZ, Economic Theory
University of Basel, Switzerland
1) MoPoS aims at providing a complement to the usual curve shifting exercises.
Students should understand the key macro-economic relationships as correlations, not as abstract curves.
And they should recognize the most important stylized facts in the simulation.
2) MoPoS tries to convey a realistic experience of the job of a central banker.
Lots of information is missing, but decisions have to be taken, and they have strong effects, sometimes with long lags.
2½) Students should have fun doing this.
When teaching introductory macro we usually use a more or less involved combination of coordinate systems in which we shift several more or less abstract curves around.
A third semester student once told me:
"Essentially, economics is curve shifting, right?"
Of course, nothing could be more wrong, but this is the impression we give.
MoPoS is a stochastic simulation of a small reduced-form mainstream macro model, which also allows the user to interact with it.
Unlike in comparative statics (i.e. curve shifting) exercises, the user of MoPoS is confronted with a constant flow of shocks. He experiences the dynamics of his policy decisions through time.
Interaction with a stochastic simulation provides a different view of the most important macroeconomic relationships, such as the IS or the Phillips curve.
It focuses on correlations and lags rather than comparative statics and abstract curves.
MoPoS allows the user to play the role of a central bank governor.
It provides a realistic simulation of the decision problem of the monetary authority, because…
Stochastic potential growth, Phillips-Curve, IS curve, quasi-rational ("OLS-learning") expectation.
pols is forecast of regression of current inflation on lagged inflation, real growth, money growth, with 1 to 4 lags. is inflation stickiness parameter.
Macroeconomic statistics are typically subject to a great deal of imprecision. They are often revised, replacing the "initial estimate" with the "final estimate."
Yet, this is what the monetary authority has, and it has to decide upon the policy stance based on such imprecise information.
(indirectly through money demand)
nominal interest rate
real interest rate
It can happen that the virtual economy falls into a deflationary spiral and ends up in a liquidity trap, because the nominal interest rate is not allowed to become negative.
In reality, a true liquidity trap is a very rare phenomenon. It requires the nominal return rates on all assets to vanish.
In the simulation, however, there is only one interest rate, and when this goes to zero and deflation is strong enough — bang! — you cannot escape the trap anymore.
So, the simulation is much more likely to experience the trap than a real economy.