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2020 | OriginalPaper | Chapter

6. The Basic Model

Author : Daniel Lukui Jia

Published in: Dynamic Macroeconomic Models in Emerging Market Economies

Publisher: Springer Singapore

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Abstract

This chapter takes the first step to develop the FHSAM. It proposes a dynamic model with two social classes in the economy. This basic two-layer model gives the preliminary attempt to model household heterogeneities in an RBC/DSGE framework. In the first section, we demonstrate the theoretical framework of this model and derive the corresponding mathematical expressions. The general equilibrium and the steady-state condition are calculated after the linearization of the dynamic system. The theoretical summary and testable hypotheses of this model is included in the second section of this chapter.

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previous chapter Overview and General Assumptions

next chapter The Advanced Model

We use Dynare 4.4.3 to undertake the empirical analysis of this model. For the details of the Dynare package, see Chapter 10 and the contribution made by Adjemian et al. [3].

Same results can be achieved using other linearization methods. To save space, we only demonstrate the method as in the text.

In this thesis, we use \(\overline{x}\) and \(x^{ss}\) interchangeably, meaning that equality \(\overline{x}=x^{ss}\) holds for all the variables in this model.

For greater details of the ’great ratio’ method, one may refer to the works of Del Negro and Schorfheide [5] and Fagiolo and Roventini [6]. An alternative way to find the steady-state solution is to linearize the model at the steady state and then to solve the resulting equations either by band or using software.

Sidrauski, M. (1967). Rational choice and patterns of growth in a monetary economy. The American Economic Review, 57(2), 534–544.

Iacoviello, M., & Neri, S. (2010). Housing market spillovers: Evidence from an estimated DSGE model. American Economic Journal: Macroeconomics, 2(2), 125–164.

Adjemian, S., Bastani, H., Karame, F., Juillard, M., Maih, J., Mihoubi, F., et al. (2017). Dynare: Reference manual (Dynare Working Papers No. 1).

Uhlig, H. (1999). A toolkit for analyzing nonlinear dynamic stochastic models easily (Federal Reserve Bank of Minneapolis Working Papers No. 101).

Del Negro, M., & Schorfheide, F. (2008). Forming priors for DSGE models and how it affects the assessment of nominal rigidities. Journal of Monetary Economics, 55(7), 1191–1208.CrossRef

Fagiolo, G., & Roventini, A. (2012). Macroeconomic policy in DSGE and agent-based models (Observatoire Français des Conjonctures Economiques Working Papers No. 124).

Title: The Basic Model
Author: Daniel Lukui Jia
Publisher: Springer Singapore
Book: Dynamic Macroeconomic Models in Emerging Market Economies
Print ISBN: 978-981-15-4587-0

Electronic ISBN: 978-981-15-4588-7

Copyright Year: 2020
DOI: https://doi.org/10.1007/978-981-15-4588-7_6