Introduction to Computational Economics Prof. Galo Nuño Banco de España 1-3 September 2010, Universitá degli Studi di Cagliari “An economic experiment consists of the act of placing people in an environment desired by the experimenter, who then records the time paths of their economic behavior. Performing experiments that use actual people at the level of national economies is obviously not practical, but constructing a model economy and computing the economic behavior of the model’s people is. Such experiments are termed computational ” Finn E. Kydland and Edward C. Prescott

1

Course goals

For the last two decades, macroeconomics has increasingly become a discipline that relies more and more on the construction of computational models as testbenchs of new ideas. In particular, since the seminal work by Kydland and Prescott (1982), a large share of research has been centered on the design of rational expectations, dynamic general equilibrium models. These models include di¤erent blocks that analyze the microfounded behaviour of households, …rms and the government. The advantage of these models is that they are not subject to the “Lucas’Critique”as agents form expectations rationally and the model’s parameters are structural. These models are now routinely used by Central Banks and International Organizations as tools to perform policy analysis and forecasting (Smets and Wouters, 2007). The aim of this course is to introduce computational methods in economics. In particular the course will be focused on the construction and analysis of real business cycles (RBC) models in Matlab, using the Dynare package. The course will be practical in nature, with sessions where students will program all the necessary routines. The couse is self-contained. The only requirement for students is to have had a previous exposure to the Ramsey model and a basic knowledge of Calculus.

2

Contents

Introduction (1/2 hour) 1

Introduction to the course What is a computational experiment? Matlab, a computing language (3 12 hours) Variables and operators Loops, graphics and functions A simple Real Business Cycle Model (1 hours) Description of the model Making the model stationary Computing steady states with Matlab (2 hours) Finding the steady state with pencil and paper Matlab routines Solving the model dynamics (3 hours) The Dynare package Solving rational expectations model and computing impulse responses

References [1] KYDLAND. F. and E. PRESCOTT (1982). “Time to Build and Aggregate Fluctuations,” Econometrica 50, pp. 1345-1370. [2] KYDLAND. F. and E. PRESCOTT (1996) “The Computational Experiment: An Econometric Tool,”Journal of Economic Perspectives. 10 (1), pp. 69-85. [3] ROSS, S. (2003). Introducción to Probability Models. Academic Press. [4] HAHN,B. D. (2006). Essential Matlab for Scientists and Engineers, Ed. Elsevier. [5] DAVE, C. and D. DEJONG (2007). Structural Macroeconometrics. Ed. Princeton University Press. [6] SMETS, F. and R. WOUTERS (2007). “Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach,” American Economic Review 97, pp. 586-606. [7] FERNADEZ-VILLAVERDE, J. (2009) “The Econometrics of DSGE Models,” PIER Working Paper. 09-008.

2