ECON343 Advanced Macroeconomics
Research Report Instructions
This report contributes to 30% of the final mark for this module. Please read this document and the research report template carefully before completing your report.
1 Instructions
Use the Matlab code provided to simulate a real business cycle model. Instructions on how to set up Matlab and run the code is provided below in section 2. Complete a research report of no more than 1,000 words. Your report should address the following three tasks:
1. Run the code to get the plot for the impulse response functions (IRFs). Interpret the economic intuitions of the plot.
2. Line 7 of the code rbc.mod declares 6 key parameters of the model after the com-mand parameters. The parameter names are separated by a space. Line 32 − 46 of the code define the 8 endogenous equations that characterise this RBC model.
(i) Use these hints to identify which parameter is the Frisch elasticity of labour supply in the code.
(ii) Change the value of this parameter to another reasonable value. Justify your choice of the parameter value. [Hint: You may with to consult the empirical literature to find the reasonable values of this parameter.]
(iii) Re-run the code to plot the IRFs under this different paramter value. Compare this plot with the plot you get from task 2 above, and explain the intuition of the difference.
3. The output of the code in the Command Window contains the THEORETICAL MOMENTS of the endogenous variables. Identify the standard deviation of the endogenous variables that you think are mostly affected by the value of the Frisch elasticity of labour supply. Compare those values produced by your exercises in Task 1 and 2 above with the business cycle evidence (such as in King and Rebelo (1999)). Given your finding in this and all above exercises, critically evaluate empirical relevance of the Real Business Cycle model.
A separate report template provides further guidance on completing the report.
2 How to Run the Code
The code needs to be run in Matlab. In addition, you will need to install Dynare in Matlab to run the code. Dynare is an extension package for Matlab. The package is widely used by academic researchers and central banks for solving and simulating a wide range of macroeconomic models.
2.1 Setting up Matlab and Dynare
1. Register a Mathworks account and associate your account with the University li-cense for Matlab. The instruction on how to do this is here.
2. Download Matlab here. You may need to sign in your Mathworks account to download the package. You can download any version ranging from R2018b to R2024b.
3. Install Matlab by following the instructions of the installer.
4. Download Dynare 6.3 here. Follow the instructions of the installer to install Dynare. For any questions related to installation, consult section 2.2 of the Dynare docu-mentation here.
5. Open Matlab. You need to add the ‘matlab’ subdirectory of your Dynare instal-lation to MATLAB path. You can do this by following the instructions in section 2.4.1 of the Dynare documentation here. There are two methods mentioned in the instructions. If you are following the first method by typing the command, the command window mentioned in the instructions is marked green in the figure be-low. Alternatively, if you are following the second method via the menu entries, the ‘Set Path’ button mentioned in the instructions is marked red in the figure below.
Now you have finished the set-up!
2.2 Running the Code
To run the code rbc.mod:
1. Open the code in Matlab by clicking Open in the top left corner (marked in red in the figure below).
2. Find the folder where you save the downloaded code. Make sure that you select All Files (marked in red in the figure below) so that you can see the code rbc.mod.
3. Choose the code file and click Open. You will be able to see the script. of the code in Editor (marked in green in the figure below).
4. Check that you ‘current folder’ is the folder where you save rbc.mod at. The way to check this is to check that the directory matches the directory of the code (marked in violet in the figure above), and that rbc.mod appears in the current folder on the left (marked in orange in the figure above).
5. If you current folder is incorrect, you can change this by clicking the small button with a downward green arrow to the left of the directory (marked in blue in the figure above)
6. Once everything is correct, type dynare rbc.mod in the command window. The running should be within seconds. You get some output in the command window and a plot of the IRFs for the 8 endogenous variables to a positive productivity shock as shown in the figure below. You can save this figure by clicking the classic blue save button on the top left of the plot window. Please make sure that you save into a format that can be inserted into your research report (e.g. .jpg, .png, etc.).
7. You can change the values of the key parameters of your choice in line 12-17 of the code. Then you can re-run the code by simply typing dynare rbc.mod again in the command window. The new set of output corresponds to the new set of parameter values.
3 Additional Information on the Model
In this model, we assume that the production function is in Cobb-Douglas form.
Meanwhile, the households’ utility function is in the following form.
4 How to Submit
The report must be submitted online through Canvas. The submission link for this is available on Canvas. The deadline for submitting research report is 14:00 on Wednes-day 7th May. If you have any issues of submitting it on Canvas, please email your report to me ([email protected]) before the deadline.
5 Further Information Regarding Dynare Codes
The code is illustrated with comments (initiated by double backward-slashes //) to help you understand what each line of code is roughly doing. For more information on the structure and specific commands of Dynare codes, you can consult here. Note that this is not necessary for completing this research report.