Developing a Dynamic Stochastic General Equilibrium Model of the Scottish Economy

October 7, 2017 Engineering

Title: Developing a Dynamic Stochastic General Equilibrium Model of the Scots Economy

[ The survey develops a dynamic stochastic general equilibrium theoretical account through the lens of New Keynesian theoretical account for unfastened economic system of Scotland and the remainder of the UK ]

Subject:Developing a Dynamic Stochastic General Equilibrium Model of the Scots Economy.

Aims of the Survey:

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  1. The survey seeks comprehensive and punctilious economic analysis of Scots economic system and its internal trading spouse, RUK [ 1 ] economic systems.
  2. Particularly, the survey develops a Dynamic Stochastic General Equilibrium theoretical account for Scots economic system and estimates the theoretical account with Bayesian technique utilizing assorted macroeconomic variables for policy analysis every bit good as for short term economic prediction.
  3. The survey investigates the theoretical account variables and historical policy description to verify the impact of the deputation on assorted policy accelerators.
  4. Finally, the survey assesses the DSGE [ 2 ] theoretical account for pecuniary and financial policy analysis with a treatment of optimum policy projections. It besides includes costs and benefits of different grades of economic degeneration and planing optimum policy under assorted instance scenarios.

Introduction and Motivation:

The modeling and prediction of quantitative macroeconomics have changed significantly over the past 30 old ages. Dynamic stochastic general equilibrium ( DSGE ) theoretical accounts are being used widely by cardinal Bankss for calculating and policy analysis due to its nature of micro-founded optimisation. Consequently to Del Negro and Schorfheide ( July 2012 ) , these theoretical accounts are used to explicate and foretell co-movements of aggregative clip series over the concern rhythm by utilizing modern macroeconomic theory.

The DSGE theoretical accounts are acquiring popularity as stipulating penchants, engineering and establishments ; it is possible to foretell the existent production, trade, and ingestion, and how these variables respond to assorted structural dazes. One of the common characteristics of these theoretical accounts is that the determination regulations of economic agents are derived from the premises about the bing pecuniary and financial policy by deciding inter-temporal optimisation issues.

The research undertaking is peculiarly motivated due to the failure of traditional macroeconomic theoretical accounts, rise and autumn of RBC [ 3 ] theoretical accounts, the beginning of New -Keynesian macroeconomics ( NKM ) research and the usage of Bayesian method for gauging DSGE theoretical account ( Almeida, 2009 ) . In add-on to that New Keynesian DSGE mold and prediction is one of the most promising field in new macroeconomic paradigm. Such a DSGE theoretical account ought to be built as boulder clay day of the month no DSGE theoretical account exists for the economic system of Scotland, to the best of my cognition.

Scope of the Research Undertaking:

The promotion of the macroeconomic model peculiarly DSGE theoretical accounts has broaden the range of the survey due to its nature of theoretical consistence and the development on empirical forepart. The usage of Bayesian econometric technique for the appraisal of DSGE theoretical account has no uncertainty created a field of range for the advancement of macroeconomic research. The usage of Vector Autoregressions ( VAR ) , Bayesian Vector Autoregressions ( BVAR ) , Vector Error Corrections Models ( VECM ) can be found in the articles such as Smets and Wouters ( 2003 ) , Del Negro, Schorfheide, Smets and Wouters ( 2005 ) , Fernandez-Villaverde and Rubio-Ramirez ( 2004 ) . The estimated New Keynesian DSGE theoretical accounts have become one of the most of import instruments in macroeconomic research as its being used for policy analysis, scenario analysis, designation of assorted dazes and short term prediction by different cardinal Bankss and finance ministries. Such theoretical accounts are used by- for illustration, Bank of Portugal, presented in Almeida ( 2009 ) for patterning Lusitanian economic system, the International Monetary Fund ( IMF ) , presented in Kumhof and Laxton ( 2007 ) for analysing financial policy. As boulder clay now no DSGE theoretical account has been specified for Scots economic system and the remainder of the UK, the research undertaking led to carry on the survey to gauge a New-Keynesian DSGE theoretical account with Bayesian technique.

Preliminary Literature Review:

  • Ve:Fiscal market clashs

, Currency hazard premia, Bettering the analysis of financial policies: abandoning Ricardian equality

DSGE mold in EMEs

These facets are non to the full discussed in the proposal. However, it is deserving adverting that there is an of import

strand of literature reasoning that whether the research will concentrate on the country which are non cover under DSGE theoretical account.

The end of Bayesian technique is to track and gauge macroeconomic clip series. One of the grounds that Bayesian method has more popularity instead over likeliness method, as utilizing the likeliness method i.e. maximising a complicated, extremely dimensional map is harder than to utilize Bayesian method where we merely necessitate to incorporate the theoretical account ( Fernandez-Villaverde, 2009 ) .

Research Methodology:

The survey estimates a New Keynesian dynamic stochastic general equilibrium ( DSGE ) theoretical account proposed by Christiano, Eichenbaum and Evans ( CEE 2001 ) and Smets and Wouter ( 2003 ) . For the building of the manipulable theoretical account of the Scots economic system and RUK, the research undertaking seeks to place the variables of the economic system, its environment, penchants, agents, engineerings, restraints and assorted types of structural dazes.

The aim of this subdivision is to place the effectivity of different policy instruments.

Initial Mentions:

Almeida, V, “Bayesian Estimation of a DSGE Model for the Portuguese Economy” , Banco De Portugal, Working Paper 14,

Campbell, L. and S. Wren-Lewis ( 2007a) , “Fiscal Sustainability in a New Keynesian Model” , Mimeo, University of Glasgow.

Cristiano, L.J. , M. Eichenbaum, and C. Evans ( 2005 ) “Nominal Rigidities and the Dynamic Effects of a Shock to Monetary policy, ”Journal of PoliticalEconomy,113, pp 1-45.

Christoffel, K. , G. Coenen, and A.Warne ( 2010 ) , “Forecasting with DSGE Models, ” in Oxford Handbook on Economic Forecasting, erectile dysfunction. by M. Clements, and D. Hendry, p. forthcoming. Oxford University Press.

Del Negro, M and Schorfheide ( 2012 ) , “DSGE Model-Based Forecasting” in Handbook of Economic Forecasting, Vol 2.

Del Negro, M. , Schorfheide, F. , Smets, F. and Wouters, R. ( 2005 ) , “On the tantrum and forecasting public presentation of new Keynesian models” ,European Central Bank – working documents seriesNo. 491.

Kumhof, M. and Laxton, D. ( 2007 ) , “A party without a katzenjammer? ” ,International Monetary Fund – Research documents seriesNo. 43.

Ratto, M. , W. Roger and J. inaˆYt Veld ( 2009 ) , “Quest Three: An Estimated Open-Economy DSGE Model of the Euro Area with Fiscal and Monetary Policy” ,Economic Modelling, Vol. 26, pp. 222-233.

Smets, F. and R. Wouter ( 2003 ) , “An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area” ,Journal of the European Economic Association, Vol. 1 ( 5 ) , pp. 1123-1175.

Fernandez-Villaverde, J ( 2009 ) , “The Econometricss of DSGE Model” , Working Paper 14677, NBER

Fernandez-Villaverde, J. and Rubio-Ramirez, J. ( 2004 ) , “Comparing dynamic equilibrium theoretical accounts to informations, a Bayesian approach” ,Journal of EconometricssVol. 123.

Tovar, C ( 2008 ) , “DSGE theoretical accounts for policy analysis at cardinal Bankss: an overview of issues and challenges” ,Bank for International Colonies


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