var V lL Vkp Valphaexp lzn lzd lp0 lpi MC lwreal lY lDisp lC lpiavg Int lA lDZ lG pistar Intr lsdf Int1 lpi1; // pricebond pricebondrn ytm ytmrn termprem ehpr slope; varexo epsA epsZ epsG epsPistar epsInt; parameters theta xi beta phi alpha eta KBar chi0 LMax chi IBar rhoinflavg taylrho DZBar taylpi tayly YBar rhoa rhoz rhog rhopistar piBar gssload consoldelta VAIMSS GBar; DZBar = 1.0025; eta = 2/3; IES = .11; phi = 1/IES; beta = .99 *DZBar^phi; delta = .02; Frisch = .28; CRRA = 110; LMax = 3; // chi0 = exp(wrealAIMSS -phi*CAIMSS) *(LMax-1)^chi; // normalize L in ss = 1 chi0 = 1/3; chi = 1/Frisch *(LMax-1); alpha = (CRRA - 1/(1/phi + 1/chi *(LMax-1))) *(1/(1-phi) + 1/(1-chi) *(LMax-1)); theta = .2; xi = .78; K_Y = 10; YBar = K_Y^((1-eta)/eta); GBar = .17 *YBar; KBar = K_Y *YBar; IBar = (delta +(DZBar-1)) *KBar; piBar = 1.0; taylrho = .73; taylpi = .53; tayly = .93; rhoa = .96; rhoz = 0; rhog = .95; rhopistar = 0; epsafl = 1; // these flags turn on or off each corresponding shock in the model epsapermfl = 0; epsgfl = 1; epsifl = 1; epspistarfl = 0; rhoinflavg = .7; // for price level targeting; set rhoinflavg = .99 or .999 gssload = 0; // this is the GSS theta parameter in the long-run nominal risks section of the paper VAIMSS = 1; consoldelta = 1; model(use_dll); // Value function and Euler equation V = exp(lC)^(1-phi) /(1-phi) + chi0 *(LMax-exp(lL))^(1-chi) /(1-chi) + beta *Vkp; Int1 = Int/10; lpi1 = lpi/10; exp(lC)^-phi = beta *exp(10*Int1-10*lpi1(+1)) *exp(lC(+1))^-phi *exp(lDZ(+1))^-phi *(V(+1) *exp(lDZ(+1))^(1-phi) /Vkp)^-alpha; // The following two equations define the E-Z-W-K-P certainty equivalent term // Vkp = (E_t V(+1)^(1-alpha))^(1/(1-alpha)). It takes two equations to do this because // Perturbation AIM sets the expected value of all equations equal to zero; E_t F(variables) = 0. // Thus; the first equation below defines Valphaexp = E_t V(+1)^(1-alpha). The second // equation then takes the (1-alpha)th root of this expectation. // Finally; the scaling and unscaling of Valphaexp by the constant VAIMSS and DZBar improves the // numerical behavior of the model; without it; the steady-state value of Valphaexp can be minuscule // (e.g.; 10^-50); which requires Mathematica to use astronomical levels of precision to solve. *) [mcp = 'Valphaexp > 1e-5'] Valphaexp = (V(+1) *exp(lDZ(+1))^(1-phi) /VAIMSS /DZBar^(1-phi))^(1-alpha); Vkp = VAIMSS *DZBar^(1-phi) *Valphaexp^(1/(1-alpha)); exp(lzn) = (1+theta) *MC *exp(lY) + xi *beta *exp(lC(+1)-lC)^-phi *exp(lDZ(+1))^-phi *(V(+1) *exp(lDZ(+1))^(1-phi) /Vkp)^-alpha *exp(lpi(+1))^((1+theta)/theta/eta) *exp(lzn(+1)); exp(lzd) = exp(lY) + xi *beta *exp(lC(+1)-lC)^-phi*exp(lDZ(+1))^-phi *(V(+1) *exp(lDZ(+1))^(1-phi) /Vkp)^-alpha *exp(lpi(+1))^(1/theta) *exp(lzd(+1)); exp(lp0)^(1+(1+theta)/theta *(1-eta)/eta) = exp(lzn-lzd); exp(lpi)^(-1/theta) = (1-xi) *exp(lp0+lpi)^(-1/theta) + xi; // Marginal cost and real wage MC = exp(lwreal) /eta *exp(lY)^((1-eta)/eta) /exp(lA)^(1/eta) /KBar^((1-eta)/eta); [mcp = 'lL < 1.0986'] chi0 *(LMax-exp(lL))^-chi /exp(lC)^-phi = exp(lwreal); // Output equations exp(lY) = exp(lA) *KBar^(1-eta) *exp(lL)^eta /exp(lDisp); exp(lDisp)^(1/eta) = (1-xi) *exp(lp0)^(-(1+theta)/theta/eta) + xi *exp(lpi)^((1+theta)/theta/eta) *exp(lDisp(-1))^(1/eta); exp(lC) = exp(lY)-exp(lG)-IBar; // aggregate resource constraint; no adj costs // Monetary Policy Rule lpiavg = rhoinflavg *lpiavg(-1) + (1-rhoinflavg) *lpi; 4*Int = (1-taylrho) * ( 4*log(1/beta *DZBar^phi) + 4*lpiavg + taylpi * (4*lpiavg-pistar) + tayly * (exp(lY)-YBar)/YBar ) + taylrho * 4*Int(-1) + epsInt; // multiply Int; infl by 4 to put at annual rate // Exogenous Shocks lA = rhoa * lA(-1) + epsA; lDZ = (1-rhoz)*log(DZBar) + rhoz * lDZ(-1) + epsZ; lG = (1-rhog)*log(GBar) + rhog * lG(-1) + epsG; pistar = (1-rhopistar) *log(piBar) + rhopistar *pistar(-1) + gssload *(4*lpiavg-pistar) + epsPistar; // Term premium and other auxiliary finance equations Intr = Int(-1) - lpi; // ex post real short rate exp(lsdf) = beta *exp(lC(+1)-lC)^-phi *exp(lDZ(+1))^-phi *(V(+1) *exp(lDZ(+1))^(1-phi) /Vkp)^-alpha /exp(lpi(+1)); //pricebond = 1 + consoldelta *beta *exp(lC(+1)-lC)^-phi *exp(lDZ(+1))^-phi // *(V(+1) *exp(lDZ(+1))^(1-phi) /Vkp)^-alpha /pi(+1) *pricebond(+1); //pricebondrn = 1 + consoldelta *pricebondrn(+1) /exp(Int); //ytm = log(consoldelta*pricebond/(pricebond-1)) *400; // yield in annualized pct //ytmrn = log(consoldelta*pricebondrn/(pricebondrn-1)) *400; //termprem = 100 * (ytm–ytmrn); // term prem in annualized basis points //ehpr = ( (consoldelta *pricebond + exp(Int(-1))) /pricebond(-1)–exp(Int(-1)) *400; //slope = ytm–Int*400; end; steady_state_model; lA = 0; lDZ = log(DZBar); lG = log(GBar); pistar = log(piBar); lpi = log(piBar); lpiavg = lpi; lDisp = 0; Int = log(DZBar^phi/beta)+lpi; Int1 = Int/10; lpi1 = lpi/10; lL = 0; lY = log(YBar); lC = log(exp(lY)-exp(lG)-IBar); lp0 = log(((exp(lpi)^(-1/theta)-xi)/((1-xi)*exp(lpi)^(-1/theta)))^(-theta)); lzd = log(exp(lY)/(1-xi *beta *exp(lDZ)^-phi *exp(lpi)^(1/theta))); lzn = log(exp(lp0)^(1+(1+theta)/theta *(1-eta)/eta)*exp(lzd)); MC = (exp(lzn)-xi *beta *DZBar^-phi*piBar^((1+theta)/theta/eta)*exp(lzn))/((1+theta)*YBar); lwreal = log(MC*eta /(exp(lY)^((1-eta)/eta) / KBar^((1-eta)/eta))); chi0 = exp(lwreal)*exp(lC)^(-phi)/(LMax-exp(lL))^(-chi); V = (exp(lC)^(1-phi) /(1-phi) + chi0 *(LMax-exp(lL))^(1-chi) /(1-chi))/(1-beta*DZBar^(1-phi)); k = 1.05; VAIMSS = k*V; Valphaexp = k^(alpha-1); Vkp = DZBar^(1-phi)*V; Intr = Int - lpi; lsdf = log(beta *exp(lDZ)^-phi/exp(lpi)); end; steady; shocks; var epsA; stderr 0.005; var epsZ; stderr 0.001; var epsG; stderr 0.004; var epsPistar; stderr 0.0005; var epsInt; stderr 0.003; end; //stoch_simul(order=3,periods=50000,pruning); extended_path(order=0,periods=3);