A typical macroeconomy is modelled as follow = = 1 E+1 [E+1] BE+++++ =...
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A typical macroeconomy is modelled as follow = = 1 E₁+1 [E₁₁+1] σ BE+++++ Пе = ? Assume σ =1, 3=0.99, w = 0.5, and K = 3 (1-w)(1-wẞ) العا Each period, assume that there are shocks to the economy given by the process u = 0.65-1+ & These could be shocks to aggregate demand (+) or to inflation (+). Finally, assume that agents form rational expectations (ET+1 = +1 and E₁₁+1 = x++1). Suppose the Bank of Canada went through a mandate renewal and could change their policy rule. They have many options: i) Flexible inflation targeting: +==+ + + ii) Average inflation target over a 2 period horizon: i = x+0x₁ where ₁ = (π₁ +π-1)/2 iii) Average inflation target over a 4 period horizon: i=0+, where π = (+++-1)/4 iv) Reacting to lagged inflation and output: i=0-1+0x1-1 Simulate the model for both a positive demand shock and a positive supply shock. In other words, do the simulation first for a one-standard deviation positive demand shock and then again for a one-standard deviation positive inflation shock. To do so, you must assume values for or and or. Select values for each and keep the values constant for the remainder of the assignment. Explain why you chose these values. Make sure o > 1 and or ≥ 0. In total, you should have 4 policy rules x 2 types of shocks = 8 simulations. To organize your results, create a table summarizing your different findings. In that table, create columns for the standard deviation of inflation, standard deviation of inflation, number of periods for output to return to steady state, number of periods for inflation to return to steady state. Dynare will produce you an impulse response for each simulation. Include each impulse response into your assignment. Then explain in detail how AND why the shock transmits through the economy for EACH simulation. Explain using insight from the household and firm's optimization problems. Doing this detailed explanation for each simulation may seem pedantic but it will help prepare you for the midterm. d) Suppose the Bank of Canada wants to keep the economy as stable as possible. Given your results, what policy framework would you recommend the Bank of Canada use for the next 5 years? Explain in detail why. Bonus question: Which of these frameworks would work best if people instead formed backward-looking expectations, e.g. E₁x+1 = -1 and E₁₁-1 = π-1. A typical macroeconomy is modelled as follow = = 1 E₁+1 [E₁₁+1] σ BE+++++ Пе = ? Assume σ =1, 3=0.99, w = 0.5, and K = 3 (1-w)(1-wẞ) العا Each period, assume that there are shocks to the economy given by the process u = 0.65-1+ & These could be shocks to aggregate demand (+) or to inflation (+). Finally, assume that agents form rational expectations (ET+1 = +1 and E₁₁+1 = x++1). Suppose the Bank of Canada went through a mandate renewal and could change their policy rule. They have many options: i) Flexible inflation targeting: +==+ + + ii) Average inflation target over a 2 period horizon: i = x+0x₁ where ₁ = (π₁ +π-1)/2 iii) Average inflation target over a 4 period horizon: i=0+, where π = (+++-1)/4 iv) Reacting to lagged inflation and output: i=0-1+0x1-1 Simulate the model for both a positive demand shock and a positive supply shock. In other words, do the simulation first for a one-standard deviation positive demand shock and then again for a one-standard deviation positive inflation shock. To do so, you must assume values for or and or. Select values for each and keep the values constant for the remainder of the assignment. Explain why you chose these values. Make sure o > 1 and or ≥ 0. In total, you should have 4 policy rules x 2 types of shocks = 8 simulations. To organize your results, create a table summarizing your different findings. In that table, create columns for the standard deviation of inflation, standard deviation of inflation, number of periods for output to return to steady state, number of periods for inflation to return to steady state. Dynare will produce you an impulse response for each simulation. Include each impulse response into your assignment. Then explain in detail how AND why the shock transmits through the economy for EACH simulation. Explain using insight from the household and firm's optimization problems. Doing this detailed explanation for each simulation may seem pedantic but it will help prepare you for the midterm. d) Suppose the Bank of Canada wants to keep the economy as stable as possible. Given your results, what policy framework would you recommend the Bank of Canada use for the next 5 years? Explain in detail why. Bonus question: Which of these frameworks would work best if people instead formed backward-looking expectations, e.g. E₁x+1 = -1 and E₁₁-1 = π-1. A typical macroeconomy is modelled as follow = = 1 E₁+1 [E₁₁+1] σ BE+++++ Пе = ? Assume σ =1, 3=0.99, w = 0.5, and K = 3 (1-w)(1-wẞ) العا Each period, assume that there are shocks to the economy given by the process u = 0.65-1+ & These could be shocks to aggregate demand (+) or to inflation (+). Finally, assume that agents form rational expectations (ET+1 = +1 and E₁₁+1 = x++1). Suppose the Bank of Canada went through a mandate renewal and could change their policy rule. They have many options: i) Flexible inflation targeting: +==+ + + ii) Average inflation target over a 2 period horizon: i = x+0x₁ where ₁ = (π₁ +π-1)/2 iii) Average inflation target over a 4 period horizon: i=0+, where π = (+++-1)/4 iv) Reacting to lagged inflation and output: i=0-1+0x1-1 Simulate the model for both a positive demand shock and a positive supply shock. In other words, do the simulation first for a one-standard deviation positive demand shock and then again for a one-standard deviation positive inflation shock. To do so, you must assume values for or and or. Select values for each and keep the values constant for the remainder of the assignment. Explain why you chose these values. Make sure o > 1 and or ≥ 0. In total, you should have 4 policy rules x 2 types of shocks = 8 simulations. To organize your results, create a table summarizing your different findings. In that table, create columns for the standard deviation of inflation, standard deviation of inflation, number of periods for output to return to steady state, number of periods for inflation to return to steady state. Dynare will produce you an impulse response for each simulation. Include each impulse response into your assignment. Then explain in detail how AND why the shock transmits through the economy for EACH simulation. Explain using insight from the household and firm's optimization problems. Doing this detailed explanation for each simulation may seem pedantic but it will help prepare you for the midterm. d) Suppose the Bank of Canada wants to keep the economy as stable as possible. Given your results, what policy framework would you recommend the Bank of Canada use for the next 5 years? Explain in detail why. Bonus question: Which of these frameworks would work best if people instead formed backward-looking expectations, e.g. E₁x+1 = -1 and E₁₁-1 = π-1. A typical macroeconomy is modelled as follow = = 1 E₁+1 [E₁₁+1] σ BE+++++ Пе = ? Assume σ =1, 3=0.99, w = 0.5, and K = 3 (1-w)(1-wẞ) العا Each period, assume that there are shocks to the economy given by the process u = 0.65-1+ & These could be shocks to aggregate demand (+) or to inflation (+). Finally, assume that agents form rational expectations (ET+1 = +1 and E₁₁+1 = x++1). Suppose the Bank of Canada went through a mandate renewal and could change their policy rule. They have many options: i) Flexible inflation targeting: +==+ + + ii) Average inflation target over a 2 period horizon: i = x+0x₁ where ₁ = (π₁ +π-1)/2 iii) Average inflation target over a 4 period horizon: i=0+, where π = (+++-1)/4 iv) Reacting to lagged inflation and output: i=0-1+0x1-1 Simulate the model for both a positive demand shock and a positive supply shock. In other words, do the simulation first for a one-standard deviation positive demand shock and then again for a one-standard deviation positive inflation shock. To do so, you must assume values for or and or. Select values for each and keep the values constant for the remainder of the assignment. Explain why you chose these values. Make sure o > 1 and or ≥ 0. In total, you should have 4 policy rules x 2 types of shocks = 8 simulations. To organize your results, create a table summarizing your different findings. In that table, create columns for the standard deviation of inflation, standard deviation of inflation, number of periods for output to return to steady state, number of periods for inflation to return to steady state. Dynare will produce you an impulse response for each simulation. Include each impulse response into your assignment. Then explain in detail how AND why the shock transmits through the economy for EACH simulation. Explain using insight from the household and firm's optimization problems. Doing this detailed explanation for each simulation may seem pedantic but it will help prepare you for the midterm. d) Suppose the Bank of Canada wants to keep the economy as stable as possible. Given your results, what policy framework would you recommend the Bank of Canada use for the next 5 years? Explain in detail why. Bonus question: Which of these frameworks would work best if people instead formed backward-looking expectations, e.g. E₁x+1 = -1 and E₁₁-1 = π-1.
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Related Book For
Macroeconomics Principles and Applications
ISBN: 978-1111822354
6th edition
Authors: Robert E. Hall, Marc Lieberman
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