Computational Macroeconomics for the Open Economy

by Lim, G. C.; McNelis, Paul D.

• ISBN13: 9780262123068
• ISBN10: 0262123061
• Format: Hardcover
• Copyright: 2008-10-03
• Publisher: The MIT Press

Summary

Policy makers need quantitative as well as qualitative answers to pressing policy questions. Because of advances in computational methods, quantitative estimates are now derived from coherent nonlinear dynamic macroeconomic models embodying measures of risk and calibrated to capture specific characteristics of real-world situations. This text shows how such models can be made accessible and operational for confronting policy issues. The book starts with a simple setting based on market-clearing price flexibility. It gradually incorporates departures from the simple competitive framework in the form of price and wage stickiness, taxes, rigidities in investment, financial frictions, and habit persistence in consumption. Most chapters end with computational exercises; the MATLAB code for the base model can be found in the appendix. As the models evolve, readers are encouraged to modify the codes from the first simple model to more complex extensions. Computational Macroeconomics for the Open Economycan be used by graduate students in economics and finance as well as policy-oriented researchers.

Author Biography

G. C. Lim is Professorial Research Fellow at the Melbourne Institute of Applied Economic and Social Research, University of Melbourne. She is the coauthor of Dynamic Economic Models in Discrete Time: Theory and Empirical Applications and An Introduction to Dynamic Economic Models (both with Brian Ferguson).

Paul D. McNelis is Robert Bendheim Chair of Economic and Financial Policy at Fordham University Graduate School of Business Administration. He is the author of Neural Networks in Finance: Gaining Predictive Edge in the Market.

Table of Contents

Preface	p. xi
Acknowledgments	p. xv
Introduction	p. 1
The Open Economy Setting	p. 1
Solution Methods	p. 3
Policy Goals, Welfare, and Scenarios	p. 13
Plan of the Book	p. 15
Computational Exercises	p. 17
A Small Open Economy Model	p. 19
Introduction	p. 19
Flexible Price Model	p. 20
Solution: Projection Method	p. 28
Stochastic Dynamic Simulations	p. 32
Effects of a Demand Shock	p. 39
Concluding Remarks	p. 43
Computational Exercise: Stochastic Processes	p. 43
Sticky Domestic Prices	p. 47
Introduction	p. 47
Model with Calvo Pricing	p. 49
Computational Analysis	p. 53
Stochastic Simulations	p. 56
Output Gaps and Sensitivity Analysis	p. 62
Concluding Remarks	p. 65
Computational Exercise: Output in the Taylor Rule	p. 66
Income and Consumption Taxes	p. 69
Introduction	p. 69
Model with Taxes	p. 71
Model Solution	p. 74
Stochastic Simulations	p. 75
Scenario Analysis	p. 79
Concluding Remarks	p. 82
Computational Exercise: Model Validation with VARs	p. 83
Current Account Dynamics	p. 85
Introduction	p. 85
Model with Endogenous Exports	p. 86
Computational Analysis	p. 90
Productivity Shocks	p. 91
Scenario Analysis	p. 94
Concluding Remarks	p. 98
Computational Exercise: Real Exchange-Rate Volatility	p. 100
Capital and Tobin's Q	p. 103
Introduction	p. 103
Model with Capital Accumulation	p. 105
Solution Algorithm	p. 109
Stochastic Dynamic Simulations	p. 113
Scenario Analysis-Q Targeting	p. 114
Concluding Remarks	p. 117
Computational Exercise: Risk and Q growth	p. 119
Economy with Natural Resources	p. 121
Introduction	p. 121
Two-Sector Model	p. 122
Solution Algorithm	p. 127
Simulation Analysis	p. 128
Terms-of-Trade Shocks	p. 132
Concluding Remarks	p. 134
Computational Exercise: Real Exchange Cross-Correlations	p. 135
Financial Frictions	p. 139
Introduction	p. 139
DSGE Model with Banking	p. 140
Solution Algorithm	p. 147
Simulation Analysis	p. 149
Scenario Analysis	p. 152
Concluding Remarks	p. 152
Computational Exercise: The "Great Moderation"	p. 153
Wage Rigidities	p. 157
Introduction	p. 157
Model with Sticky Wages	p. 158
Solution Algorithm	p. 164
Simulation Analysis	p. 165
Sensitivity Analysis	p. 168
Concluding Remarks	p. 170
Computational Exercise: Dunlop-Tarshis Puzzle	p. 171
Habit Persistence	p. 173
A DSGE Model with Habit Persistence	p. 174
Solution Algorithm	p. 180
Stochastic Simulations	p. 181
Simulating Alternative Scenarios	p. 185
Concluding Remarks	p. 187
Computational Exercise: Output and Interest Rate	p. 188
International Capital Flows and Adjustment	p. 191
Capital Reversals	p. 192
Continuing Inflows	p. 194
Future Research	p. 196
Appendixes
Definition of Symbols	p. 201
Definition of Variables	p. 203
The Computer Algorithm	p. 205
Notes	p. 211
Bibliography	p. 215
Index	p. 225
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