A PRIMER IN THE ESTIMATION OF DYNAMIC MACROECONOMIC MODELS
Juan Rubio-Ramírez (Duke University)
Jesús Fernández-Villaverde (University of Pennsylvania)

Objectives

This course will present a modern dynamic equilibrium model with a rich specification of the nominal component (sticky prices and sticky wages, role of money) and its real component (adjustment costs in investment, variable capital utilization, habit persistence, taxes, open economy). We will discuss the strengths and weaknesses of this type of models, its microfoundations (or lack of), and the general direction of the research agenda: why we want to formulate such a model, what can we expect from the modeling exercise, and what we cannot. We will also review the techniques required to solve the model, basically perturbation theory. We will also expand the model to consider nonlinear features like stochastic volatility or Markov switching. Then, we will move towards the estimation of the model, both linearly and nonlinearly, using the likelihood function. The course will finish with a short introduction to policy analysis using DSGE models.

Intended for

Researchers in macroeconomics and forecasting, central bankers, and economists in financial institutions interested in macroeconomic analysis and policy.

Prerequisites

Advanced macroeconomics and econometrics at a good undergraduate level. Macroeconomics at the level of Advanced Macroeconomics by David Romer (McGraw-Hill/Irwin, 2nd edition, 2000), will be useful, but not crucial.

Topics

Specification. Review of a basic dynamic macroeconomic model with nominal rigidities.

Solution. Linearization techniques. Second order approximations and other nonlinear methods.

Estimation. Likelihood methods. Monte Carlo methods. Markov Chain Monte Carlo techniques. Filtering theory.

Policy analysis. Introduction. Optimal monetary policy.