## Fiscal and Monetary Policy Analysis with DSGE Models (DSGE) ## Source details **Canonical URL:** [Fiscal and Monetary Policy Analysis with DSGE Models (DSGE)](https://www.imf.org/-/media/files/icd/dsge.pdf) ## Other formats - [Markdown version](/-/media/files/icd/dsge.pdf.md) - [Structured JSON version](/-/media/files/icd/dsge.pdf.json) --- ### Objectives - A two-week course, presented by the IMF’s Institute for Capacity Development, focuses on the use and interpretation of dynamic stochastic general equilibrium (DSGE) models. - Emphasis on applications of fiscal and monetary policies using models with nominal and real rigidities commonly used in central banks and ministries of finance. - Relies on case studies relevant for the region to illustrate applications and to show how DSGE models can be used as an input in the policymaking process. ### Topics (Core Units) - 1. The real business cycle model - 2. The New Keynesian model - Monetary policy - The use of MATLAB/Octave Dynare/Iris for DSGE models - 3. Labor market rigidities in the NK model - 4. The NK model in an Open Economy - Monetary and fiscal policy analysis - 5. Fiscal policy in the NK Model - 6. A new Keynesian Model with Financial frictions - 7. Bringing DSGE models to the data (1) - State-Space models - Bayesian techniques - 8. Bringing DSGE models to the data (2) - Forecasting with DSGE models - 9. Policy applications with DSGE models - 10. Course summary and key takeaways ### Target Audience and Prerequisites - Target Audience: - Mid- to senior-level officials from central banks and ministries of finance involved in the macroeconomic analysis of monetary and fiscal policy issues with DSGE models. - Prerequisites: - Participants should have an advanced degree in economics or equivalent experience, good quantitative skills, and a basic knowledge of MATLAB/Octave and Dynare/Iris or equivalent software. - It is highly recommended that they have taken the modules available online for this course. ### Performance Evaluation - Two multiple-choice quizzes will be given. - One online-quiz will be given at the beginning and the other one at the end of course. - If the evaluation process is universally adopted, then tests results should be recorded in participants’ evaluation. ### Unit-level Outlines, Workshops, and Key Activities - UNIT 1: THE REAL BUSINESS CYCLE MODEL - Outline of Lecture (3 hours) - Introduction to the basic Real Business Cycle (RBC) model - Bellman equation and optimization - Derivation of the first-order conditions, deterministic steady-state, log-linearization of equilibrium conditions - Calibration - Solution methods for linear rational expectations models. - Workshop (3 hours) - Topics: Introduction to MATLAB/Octave and Dynare/Iris. Simulation of the basic RBC model - Activity: (1) introduces the MATLAB/Octave plus Dynare/Iris programming environment, (2) the structure of a Dynare/Iris program and basic commands for model simulation, (3) studies the dynamic properties of the model through impulse responses in a calibrated real business cycle model to various shocks. - UNIT 2: THE NEW KEYNESIAN MODEL - Outline of Lecture (3 hours) - Introduction to the basic New Keynesian (NK) model for monetary policy analysis. - Main imperfections and assumptions of the model (monopolistic competition and sticky prices) and derivation of the key equations. - Workshop (3 hours) - Topic: Simulation of the basic NK model. - Activity: Discussion of the dynamic properties of the model through impulse responses in a calibrated NK model to various shocks. - UNIT 3: LABOR MARKET RIGIDITIES IN THE NEW KEYNESIAN MODEL - Outline of Lecture (3 hours) - The “Divine Coincidence” and the role of sticky wages - Optimal monetary policy under labor market frictions - Labor market search models - A NK model with commodities (oil price shocks) and wage rigidities - Workshop (3 hours) - Topic: The effects of oil prices in an economy with labor market rigidities. - Activity: (1) discussed how the introduction of sticky wages affects the dynamics of the NK model, (2) estimates the impacts of oil price shocks in economies with no labor market frictions; and (3) estimate the transmission of oil price shocks in an economy with labor market rigidities. - UNIT 4: THE NEW KEYNESIAN MODEL IN AN OPEN ECONOMY - Outline of Lecture (3 hours) - Extension to an small-open economy framework - International risk-sharing - Discussion of fixed versus flexible exchange rates - Workshop (3 hours) - Topic: The transmission mechanism in the open economy - Activity: Discusses the transmission mechanisms under fixed versus flexible exchange rates. Extension to include oil as input in the production function and as part of the consumption basket. - UNIT 5: FISCAL POLICY IN THE NEW KEYNESIAN MODEL - Outline of Lecture (3 hours) - Extensions of the NK model to distortionary taxation, liquidity constrained households and OLG Households - Introducing a fiscal policy reaction function - Workshop (3 hours) - Topic: The effects of fiscal policy in the NK model and interactions between fiscal and monetary policy - Activity: Illustrates the effects of various fiscal policies (1) simulate the effect of different fiscal policy shocks (fiscal multipliers to government spending and tax shocks) under different assumptions for monetary policy. - UNIT 6: A NEW KEYNESIAN MODEL WITH FINANCIAL FRICTIONS - Outline of Lecture (3 hours) - A medium scale model in an open economy with financial frictions (financial accelerator model) - Macro-prudential policies and financial frictions - Workshop (3 hours) - Topic: External shocks, monetary and macro-prudential policies - Activity: Helps to generate optimal responses of monetary, fiscal, and macro-prudential policies to capital flows. - UNIT 7: BRINGING DSGE MODELS TO THE DATA (1) - Outline of Lecture (3 hours) - State-space model representation, the Kalman Filter and Maximum Likelihood estimation of linearized DSGE models - Introduction to Bayesian methods - Bayesian estimation of linearized DSGE models (Markov Chain Monte Carlo methods, the Metropolis-Hastings algorithm). - Workshop (3 hours) - Topic: Bayesian estimation of DSGE Models - Activity: Presents applications of different techniques to estimate DSGE models on simulated data. - UNIT 8: BRINGING DSGE MODELS TO THE DATA (2) - Outline of Lecture (3 hours) - Forecasting with DSGE models (conditional and unconditional), forecasting performance of DSGE models - Generating risk scenarios and fan charts - Workshop (3 hours) - Topic: Forecasting with DSGE models - Activity: Generate scenarios and fan charts using data from a real economy. - Note: It is recommended the adoption of regional examples/applications for each division. - UNIT 9: POLICY APPLICATIONS WITH DSGE MODELS - Outline of Lecture (3 hours) - Use of DSGE models for computing natural levels - Conducting counterfactual policy analysis - Workshop (3 hours) - Topic: Application the case of Chile - Activity: Describes how to conduct policy analysis and counterfactual policy analysis using the Chilean economy. - Note: It is recommended the adoption of regional examples/applications for each division. - UNIT 10: COURSE SUMMARY AND KEY TAKEAWAYS - Outline (1 hour) - Key takeaways from lectures and workshops ### Summary of Instructional Time and Other Components - Topics Lecture Workshop - 1. The Real business Cycle Model 3 3 - 2. The New Keynesian Model 3 3 - 3. Labor Market Rigidities in the NK Model 3 3 - 4. The NK Model in an Open Economy 3 3 - 5. Fiscal Policy in the NK Model 3 3 - 6. A NK Model with Financial Frictions 3 3 - 7. Bringing DSGE Models to the Data 1 3 3 - 8. Bringing DSGE Models to the Data 2 3 3 - 9. Policy Applications with DSGE Models 3 3 - 10. Course Summary and Main Takeaways 1 - Subtotal 28 27 - Other Components - Admin Briefing 1 - Welcome 0.5 - Introductory remarks 0.5 - Initial/Final Quizzes 1 - Participant course evaluation 0.5 - Subtotal 3.5 0 - Total 31.5 27 --- _Source: https://www.imf.org/-/media/files/icd/dsge.pdf_