Quantitative Macroeconomics

Dynare Exercise – The New Keynesian Model

Andreas Tischbirek

Department of Economics
HEC Lausanne

23 November 2020
Introduction

Last week: Introduction to Dynare based on the RBC model

Goal of today is to simulate the New Keynesian model
Note that the model is already in (log-)linear form (see next slide)
⇒ Because Dynare does not have to linearise the model, one should
add the option “linear” to the model command, i.e. the model block
should read as follows

model(linear);
Model equations
end;

UNIL-HEC Dynare Exercise 23 November 2020

New Keynesian Model
Supply side described by

πt = βEt πt+1 + κyt (1)

Demand side described by

1
yt = Et yt+1 − (it − Et πt+1 − rtn ) (2)
σ
Monetary policy rule

it = φπ πt + φy yt + ut (3)

Laws of motion

rtn = ρr rt−1
n
+ εr ,t (4)
ut = ρu ut−1 + εu,t (5)

with |ρr | < 1, |ρu | < 1, εr ,t ∼ N(0, σr2 ) and εu,t ∼ N(0, σu2 )
UNIL-HEC Dynare Exercise 23 November 2020
Calibration

A calibration suggested by Gali (2008) is

β = 0.99
κ = 0.1275
σ=1
φπ = 1.5
φy = 0.125
ρr = 0.9
ρu = 0.5
σr = 0.01
σu = 0.0025

UNIL-HEC Dynare Exercise 23 November 2020

Instructions

Use Dynare to generate the impulse responses (for 20 periods) to

a monetary policy shock
a shock to the natural real interest rate
To do so, think about the following
How does the preamble have to be filled out here correctly?
Are there variables for which one has to be careful about
beginning-of-period vs. end-of-period notation?
What is the steady state of the model?
Interpret the impulse response functions
What do you conclude from the variance decomposition that is part
of the output?
Try to simulate the model using a value for φπ that is smaller than
one. What does your result imply for the conduct of monetary policy?

UNIL-HEC Dynare Exercise 23 November 2020

References

Dynare Reference Manual

(https://www.dynare.org/wp-repo/dynarewp001.pdf)

UNIL-HEC Dynare Exercise 23 November 2020