DSGE MODELING IN MACROECONOMICS: Macro/Finance Applications

By Lawrence J. Christiano

Overview

These lectures will build on the lectures presented by Prof. Eichenbaum on the basic New Keynesian model. Where possible, I will describe the environment explicitly, but in some cases I will resort to a more informal style and direct people to references for details. The hope is to give the listener a sense of what is being done in macro/finance.

General background material for these lectures include Journal of Economic Perspectives, JIMF, IMF interview and this).

Lectures

Introductory Remarks.

1) Consequences for Policy of the Lower Bound on Nominal Interest Rates.

2) Frictions in Financial Firms Useful for Thinking About the 2008 Financial Crisis.

a) Two-period exposition of Gertler-Karadi/Gertler-Kiyotaki model in which the financial frictions stem from bankers’ ability to ‘run away’ (section 3 in reading).

b) Informal extension of analysis in (a) to multiple periods and to bank runs (‘rollover crises’), using Gertler-Kiyotaki AER2015 (the discussion here is a sketch of this more extended discussion).

3) Financial Frictions in Nonfinancial Firms Useful for Thinking About Business Cycles:

a) Partial equilibrium model for the Costly State Verification (CSV) approach (zip file with code for the computations, and a version of the  slides with more extensive derivations). Related empirical paper: Levin, Natalucci and Zakrajsek.

b) Integrating CSV into a New Keynesian model and the results of Bayesian estimation of the model using US data (CMR, JMCB 2003, AER 2014).

i) The model.

ii) The importance of risk shocks and news on risk.

iii) The response of monetary policy to an increase in interest rate spreads.

iv) Carefully documented (thanks to Ben Johannsen) Dynare code for replicating the material in this presentation.

4) A model of how deleveraging can cause a drop in interest rates, employment, GDP and TFP. A few results in the handout are asserted without proof. The lyx file underlying the handout, contained in this zip file, includes the proofs in lyx ‘notes’.