ME421 Tools for Macroeconomists: The Essentials

The 2016 Methods Summer Programme is now closed. Details for the 2017 Programme will be available soon.

This is a hands-on graduate-level course teaching key techniques to analyse and estimate macroeconomics models. It teaches the key building blocks of numerical analysis such as function approximation and numerical integration. The course shows how these techniques are used in perturbation and projection methods to accurately solve nonlinear dynamic stochastic models. Relevant theoretical aspects such as the Blanchard-Kahn conditions and the possibility of sunspots solutions are also covered. The course also teaches the tools to estimate such models (Kalman filter, Bayesian estimation, MCMC). 

Students are taught how to use Dynare, but also how to write Matlab programs to solve a variety of models with other techniques. In addition to teaching techniques, the course also focuses on practical problems that researchers run into when using these techniques.

The course is aimed at PhD students and academics.

Course benefits

This course will provide students with:

• a chance to learn a solid set of different tools to analyse and estimate modern macroeconomic models
• a better understanding of the properties of modern macroeconomic models
• a better understanding of the importance of nonlinearities
• a better understanding of the limitations of popular techniques

Prerequisites
Basic knowledge of DSGE models, and in particular, concepts such as Euler equations, state variables, and the Bellman equation.
Some knowledge of Matlab. Students with a rudimentary knowledge of Matlab may still take the course, but may not attain the full benefits of the afternoon computer assignments.

The course teaches the key building blocks of numerical analysis such as function approximation and numerical integration. The course shows how these building blocks are used in perturbation and projection methods to accurately solve nonlinear dynamic stochastic models. Relevant theoretical aspects such as the Blanchard-Kahn conditions and the possibility of sun spots solutions are also covered. The course also teaches the tools to estimate such models with Bayesian estimation techniques.

In the morning sessions, a lecture is given by one of the two instructors. In the afternoon sessions, students work in groups on computer assignments with the help of the instructors and teaching assistants.

Monday - Solving and analysing your first DSGE model

• State variables
• Policy rules (i.e. the recursive solution to DSGE models)
• Impulse response functions
• Perturbation analysis
• Certainty equivalence
• Dynare
• Using the homotophy idea to get good initial values for the steady state (often the hardest part of running Dynare)
• Parameter values and properties of basic neoclassical model
• Stylised facts

Tuesday - Key tools from the numerical approximation literature and projection methods

• Numerical integration (Gaussian quadrature)
• Function approximation (Splines & Polynomials)
• Projection methods
• Endogenous grid points
• Fixed point iteration
• Time iteration

Wednesday - Topics

• Parameterized Expectations Algorithm
• Value Function Iteration
• Accuracy tests: Euler errors, Dynamic Euler equation test, DHM statistic
• Occasionally binding constraints and penalty functions
• Blanchard-Kahn conditions
• Sunspots and self-fulfilling expectations

Thursday - Kalman filter and full information methods

• Kalman filter
• State space form
• Maximum Likelihood
• Avoiding the singularity problem

Friday - Bayesian estimation

• Bayesian estimation
• MCMC
• Metropolis Hastings

Software used
Dynare and MATLAB

"An all-around outstanding learning experience!"
Attendee of Tools for Macroeconomists: The Essentials in 2014

"I thought Petr and Wouter were amazing at simplifying difficult concepts and boiling it down to the core."
Attendee of Tools for Macroeconomists: The Essentials in 2014

"Excellent. The instructor introduces several frontier fields of research."
Attendee of the 2011 LSE Macroeconomics Summer Programme

"The course sets the right focus, and is very well organized and structured. The professor is an excellent teacher and highly committed."
Attendee of the 2011 LSE Macroeconomics Summer Programme

Please note: A full timetable will be provided at registration on Monday 15 August. The below timetable contains approximate hours only.

	M	Tu	W	Th	F
Morning lecture	3	3	3	3	3
Afternoon class	3	3	3	3	3