DSGE Modeling

We propose a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model where a risk aversion shock enters a separable utility function. We analyze five periods from 1971 through 2011, each lasting for twenty years, to follow over time the dynamics of several parameters such as the risk aversion parameter; the Taylor rule coefficients; and the role of the risk aversion shock in output, inflation, interest rate, and real money balances in the Eurozone. Our analysis suggests that risk aversion was a more important component of output and real money balance dynamics between 2006 and 2011 than it was between 1971 and 2006, at least in the short run.

Perkembangan analisis ekonomi modern dewasa ini telah banyak mengalami pergeseran dan perkembangan terutama dalam analisis yang bersifat dinamis. Salah satu model analisis kebijakan ekonomi dinamis yang banyak digunakan adalah Model Dynamic Stochastic General Equilibrium (DSGE). Dalam sejarahnya Model DSGE pertama kali digunakan oleh Sveriges Riksbank, Bank Sentral Swedia dalam merumuskan kebijakan moneter (Adolfon, et al., 2007) 1 .

In this study we estimate a Dynamic Stochastic General Equilibrium (DSGE) model using Bayesian techniques to analyse the effects of monetary and fiscal policy in Morocco. The results suggest that a positive monetary policy shock generates a diminution of consumption, investment, output and inflation. A positive shock on government expenditures produces an increase in output and wage but generates also a decrease in private consumption and investment due to an increase in inflation and interest rate. Finally, a positive shock on capital tax produces a decrease in investment and thus in output. In general, the duration of monetary shock is shorter than fiscal shock; the first vanishes in about 10 quarters and the latter is more persistent and lasts more than 15 quarters.

In this study we estimate a Dynamic Stochastic General  Equilibrium (DSGE) model using Bayesian techniques to analyse the effects of monetary and fiscal policy in Morocco. The results suggest that a positive monetary policy shock generates a diminution of consumption, investment, output and inflation. A positive shock on government expenditures produces an increase in output and wage but generates also a decrease in private consumption and investment due to an increase in inflation and interest rate. Finally, a positive shock on capital tax produces a decrease in investment and thus in output. In general, the duration of monetary shock is shorter than fiscal shock; the first vanishes in about 10 quarters and the latter is more persistent and lasts more than 15 quarters.

La politique budgétaire peut impacter la conduite de la politique monétaire à travers de multiples canaux. En effet, l’accroissement des dépenses publiques orienterait, à court terme, la demande, tandis que les investissements de long terme agiraient sur le sentier de production de l’économie et, in fine, sur la trajectoire future de l’inflation. De son côté, la politique monétaire, par le biais de la variation des taux d’intérêt, influerait également sur les coûts de refinancement du Trésor public, et partant, sur le niveau du déficit budgétaire et dans une certaine mesure sur la soutenabilité de la dette publique. Dans un contexte où les banques centrales ont renforcé leur indépendance vis-à-vis des Gouvernements, les interactions entre la politique monétaire et la politique budgétaire ne peuvent que s’accentuer au fur et à mesure que les évolutions économiques les mènent vers des choix opposés. L’objectif du présent travail est d’analyser les interactions entre la politique budgétaire et la politique monétaire au Maroc. La démarche adoptée se décline en trois étapes. La première a consisté en une présentation de la littérature théorique. La seconde s’est attelée à présenter le modèle DSGE estimé en vue d’analyser les interactions entre la politique budgétaire et la politique monétaire. Enfin, les différentes simulations ont révélé que les politiques économiques au Maroc s’inscrivent dans un modèle d’équilibre stratégique orienté vers la croissance et la stabilité du cadre macroéconomique.

The aim of this thesis is to evaluate the conduct of macroprudential policies in an heterogenous monetary union, such as the Eurozone, by borrowing on the very recent theoretical and empirical developments of Dynamic Stochastic General Equilibrium (DSGE) models and Bayesian econometrics. We account for two main patterns of the Eurosystem: the business cycles divergence between core and peripheral countries and the globalization of banking and its spillovers when implementing macroprudential policies. As a main result, the implementation of macroprudential policy measures improves welfare at the global level. The highest welfare gains are observed when countries use multiple instruments and when macroprudential policy is implemented in a granular fashion. However, the conduct of macroprudential policy is not a free lunch for participating countries: in most situations, peripheral countries are winners while core countries record either smaller welfare gains or even welfare losses. In many policy experiments, we find that there exists an equilibrium that combines welfare increases at both the global and national levels for all participants but its enforceability requires a federal action, thus justifying the existence of a coordination mechanism such as the ESRB in the Eurozone. Finally, the possibility of banks to engage in cross border lending introduces an important spillover channel that tends to increase the welfare gains associated to macroprudential measures. Ignoring this phenomenon may lead to fallacious results in terms of the welfare ranking of alternative implementation schemes.

Advanced Bayesian methods are employed in estimating dynamic stochastic general equilibrium (DSGE) models. Although policymakers and practitioners are particularly interested in DSGE models, these are typically too stylized to be taken directly to the data and often yield weak prediction results. Hybrid models can deal with some of the DSGE model misspecifications. Major advances in Bayesian estimation methodology could allow these models to outperform well-known time series models and effectively deal with more complex real-world problems as richer sources of data become available. A comparative evaluation of the out-of-sample predictive performance of many different specifications of estimated DSGE models and various classes of VAR models is performed, using datasets from the US economy. Simple and hybrid DSGE models are implemented, such as DSGE–VAR and Factor Augmented DSGEs and tested against standard, Bayesian and Factor Augmented VARs. Moreover, small scale models including the real gross domestic product, the harmonized consumer price index and the nominal short-term federal funds interest rate, are comparatively assessed against medium scale models featuring additionally sticky nominal prices, wage contracts, habit formation, variable capital utilization and investment adjustment costs. The investigated period spans 1960:Q4–2010:Q4 and forecasts are produced for the out-of-sample testing period 1997:Q1–2010:Q4. This comparative validation can be useful to monetary policy analysis and macro-forecasting with the use of advanced Bayesian methods.

The monetary policy framework of many countries has been developed under an Inflation Targeting Framework, which is a fixed central bank interest rate. The well-known Taylor's Rule is the rule of monetary policy applied in empirical evidence for the mode of transmission mechanisms of the Central Bank. Microfoundations in Log-linear terms are consistent in line with Kranz (2015), however countries such as: China, Nigeria, Bolivia, Yemen, Suriname, among others, are in a different framework, control of the money supply (the IMF defines as Monetary Objective Aggregate). The MacCallum's Rule proposed in the 1980s would be more appropriate to describe the transmission mechanisms of monetary policy in this type of policy. But in the present investigation it is based on a monetary policy rule different from the conventional ones. Thanks to the contribution of William Poole in 1970, our Policy Rule explains that the money supply reacts to the behavior of five (5) variables: product gap, interest rate gap, observed interest rate, product expectations and inflation; for what we call this instrument the Poole's Rule. Through a Dynamic Stochastic General Equilibrium Model (DSGE) we check if said rule is appropriate for economies under a different Inflation Targeting Framework.

This paper seeks to evaluate quantitatively how interbank and corporate crossborder flows shape business cycles in a monetary union. Using Bayesian techniques, we estimate a two-country DSGE model that distinguishes between Eurozone core and peripheral countries and accounts for national heterogeneities and a set of real, nominal and financial frictions. We find evidence of the key role of this
cross-border channel as an amplifying mechanism in the diffusion of asymmetric shocks. Our model also reveals that under banking globalization, most national variables and the central bank interest rate are less sensitive to financial shocks while investment and current account imbalances are more sensitive to financial shocks. Finally, a counterfactual analysis shows that cross-border lending has
affected the transmission of the recent financial crisis between the two groups of countries.

En este artículo se utiliza un modelo dinámico estocástico de equilibrio general (DSGE) neoclásico para evaluar el impacto de choques de oferta (productividad) y demanda (comercio externo) sobre el desempeño económico. Además, se analizan decisiones de política económica, en especial, el efecto del gasto público sobre la economía según las condiciones en que éste se realice. Los ejercicios realizados muestran que con un modelo de economía abierta, una política expansiva de gasto público incrementa en el corto plazo el empleo y el producto, pero se incurre en un costo futuro adicional, que parece sugerir un impacto superior al beneficio alcanzado en el corto plazo.

Inflation forecasts are a key ingredient for monetary policy-making – especially in an inflation targeting country such as South Africa. Generally, a typical Dynamic Stochastic General Equilibrium (DSGE) only includes a core set of variables. As such, other variables, for example alternative measures of inflation that might be of interest to policy-makers, do not feature in the model. Given this, we implement a closed-economy New Keynesian DSGE model-based procedure which includes variables that do not explicitly appear in the model. We estimate such a model using an in-sample covering 1971Q2 to 1999Q4 and generate recursive forecasts over 2000Q1 to 2011Q4. The hybrid DSGE performs extremely well in forecasting inflation variables (both core and nonmodelled) in comparison with forecasts reported by other models such as AR(1). In addition, based on ex-ante forecasts over the period 2012Q1–2013Q4, we find that the DSGE model performs better than the AR(1) counterpart in forecasting actual GDP deflator inflation.

In an estimated DSGE model of the European Monetary Union that accounts for financial differences between core and peripheral countries, we find that country-adjusted macroprudential measures lead to significant welfare gains with respect to a uniform macroprudential policy rule that reacts to union-wide financial developments. However, peripheral countries are the winners from the implementation of macroprudential measures while core countries incur welfare losses, thus questioning the interest of adopting coordinated macroprudential measures with peripheral countries.

The global financial and European debt crises exposed the need for a new approach to fiscal modeling to support decision making analytically. With this purpose, in the following paper we present a macro-fiscal model. By capturing macro-fiscal interlinkages, especially those between fiscal variables and exchange rates, the model enables to analyze various fiscal scenarios with the focus of its impact on debt sustainability and real sector, as well as to conduct forecasting exercises, for small open economies with potentially large share of foreign currency denominated debt in the overall public debt. Finally, the model is applied to Georgian economy to interpret its’ historical data, provide an optimal policy path for future and analyze debt sustainability under several stress scenarios.

The work is aiming at introducing behavioral assumptions in a New Keynesian fashion. I present a baseline NK-DSGE where financial holdings enrich the agents' preferences through a state-dependent function reflecting Prospect Theory phenomena. The model strengthens real variables' dynamics along the business cycle. In particular, when a positive monetary shock occurs households tend to accumulate less financial activities and consume more with respect to standard NK-DSGE.

We estimated  a dynamic stochastic general equilibrium (DSGE) model based  on the features of the Ghanaian Economy, then examined the persistent effects of world oil  price and monetary policy shocks (money supply-interest rate induced) on economic growth  in
Ghana. It was realized that, a  shock  on interest rate leads to a sharp  fall  in prices which reflects  the impact of the decrease in interest rate on the marginal cost.  There is a paradoxical effect of  a  negative interest rate on  total money supply. We also showed that a positive output shock has the same effect on consumption,  investment, prices and wages as in the case of  interest  rate shock.

We provide a tool for estimating DSGE models by Bayesian Maximum-likelihood methods under very general information assumptions. This framework is applied to a New Keynesian model where we compare the standard approach, that assumes an informational asymmetry between private agents and the econometrician, with an assumption of informational symmetry. For the former, private agents observe all state variables including shocks, whereas the econometrician uses only data for output, inflation and interest rates. For the latter both agents have the same imperfect information set and this corresponds to what we term the 'informational consistency principle'. We first assume rational expectations and then generalize the model to allow some households and firms to form expectations adaptively. We find that in terms of model posterior probabilities, impulse responses, second moments and autocorrelations, the assumption of informational symmetry by rational agents significantly improves the model fit. We also find qualified empirical support for the heterogenous expectations model. JEL Classification: C11, C52, E12, E32.

This master’s thesis paper analyses the DSGE model with a shadow banking system by Verona, Martins and Drumond (2013). Motivated by the recent financial crisis, the model is built to address the issue of too low for too long monetary policy as a trigger of the financial turmoil of 2007-08. The main result of the model is that too accommodative monetary policy causes a boom-bust only in combination with microeconomic distortions (excessive optimism) in the financial markets. Simulations of anticipated and unanticipated policy scenarios also show that the crisis was further aggravated by agents failure to anticipate the extent and duration of abnormally favorable macroeconomic policy.

In this paper we develop a dynamic stochastic general equilibrium (DSGE) model for an open economy, and estimate it on Euro area data using Bayesian estimation techniques. The model incorporates several open economy features, as well as a number of nominal and real frictions that have proven to be important for the empirical fit of closed economy models. The paper offers: i) a theoretical development of the standard DSGE model into an open economy setting, ii) Bayesian estimation of the model, including assesments of the relative importance of various shocks and frictions for explaining the dynamic development of an open economy, and iii) an evaluation of the model's empirical properties using standard validation methods.

The aim of this paper is to analyze Michael Woodford's contri-
butions to economic theory, namely his works in monetary policy.
Among several publications, the most important was his book Interest
and Prices: Foundations of a Theory of Monetary Policy, published in
2003. It built the foundations for analyzing and designing monetary
policy considering microfoundations and frictions in what has been
called a New Keynesian framework.

DSGE models (Introduction) have recently been criticized by P. Romer (2016) as pseudoscientific (Section 1). Their dominance is attributed to the uncritical " deference to authority " that has dominated macroeconomics " for the last 30 years ". In contrast, the paper aims to support the widespread view that – their problems notwithstanding – DSGE models meet the epistemic standards of scientific research. The argument turns on the recent advancements in theories of scientific representation (Section 1) and of empirical grounding (Section 2). The latter is illustrated with a historical case, which also substantiates Romer's constructive point on the role of theory in design of measurements.

Bayesian estimation is employed to investigate whether deep as opposed to superficial habit improves the fit of a dynamic stochastic general equilibrium model. If the stock of superficial habit features the additional persistence typical of deep habit, the two specifications are virtually as good. Introducing deep habit in public consumption does not improve the model’s fit.

h i g h l i g h t s • We propose a refinement of Ascari's (2004) model by introducing two theoretical important ingredients. • We propose a re-evaluation of the macroeconomic effects of non-zero trend inflation. • The omission of some important theoretical ingredients significantly distorts the results obtained to date. a b s t r a c t To date, most of the papers which have examined the effects of trend inflation on the properties of New Keynesian model were based on relatively simple sticky-prices DSGE models and whose realism was sometimes questionable. In this paper, we re-evaluate the macroeconomic effects of non-zero trend inflation. Building on the model of Ascari (2004) as one of the most-cited papers in the literature on the effects of trend inflation, we show that the omission of some important theoretical ingredients significantly distorts the results obtained to date. We propose a refinement of this model by introducing two theoretical important ingredients, namely investment adjustment costs, and a roundabout production structure. Once we add these features to make the model more realistic, as commonly for medium-scale models, we find that the standard New Keynesian model without real frictions overestimates the short-term macroeconomic effects of a positive trend inflation rate and underestimates those of the long term.

We follow Brouwer and Ericsson (1998) approach in order to estimate a mark-up
model of price over unit costs in Morocco from 1997q1 to 2013q2. This kind of models assumes that
the equilibrium price level is set as a markup on some combination of input prices. Therefore, by
estimating the short-run and long-run price elasticities with respect to unit labor costs and import
prices, it’s possible to calculate the impact of supply shocks related to production costs. This treatment
of price dynamics is at the heart of the modern approach to modelling inflation, both for forecasting
and for policy analysis. The mark-up model identified in this paper highlight the fact that unit labor
costs and import prices are key factors in the price setting strategy of the Moroccan firms.

This paper considers the persistence puzzle unveiled by Chari et al. (2000). Our findings show that endogenously persistent output dynamics are not a puzzle for the standard sticky-price model once roundabout production is taken into account. We make this point using a new-Keynesian framework emphasizing an inertial mechanism called the multiplier for price stickiness in the spirit of Basu (1995).

This paper analyzes the behavior of international gross capital flows over the business cycle in a two-country DSGE portfolio choice model with shocks to both the transitory and trend components of the endowment. Empirical work on international capital flows documents weakly procyclical, and at times, countercyclical gross financial flows between economies. This observation cannot be reconciled with the predictions of the standard open economy model. These models typically employ transitory productivity shocks as the main driver of business cycles. However the recent theoretical and empirical literatures emphasize the importance of shocks to the trend component of output in matching business cycle moments with data. Our main finding is that transitory shocks result in strongly procyclical gross capital flows, while trend shocks yield weakly countercyclical gross outflows and weakly procyclical gross inflows. Overall, both the magnitude and the sign of correlation coefficients from our model are more consistent with the empirical evidence in the literature. We demonstrate that transitory shocks alone cannot produce results that are in line with the empirical evidence. This finding holds true for different levels of persistence of the transitory shocks. We illustrate that empirically sound predictions are the result of the separation of the transitory and trend shocks.

Public capital investment (both investment in infrastructure and investment in human capital) is assumed to be one of the most important determinants of economic growth in theoretical literature. While the effects of public investment on GDP growth and other macroeconomic indicators vary across different countries. Thus, from policymaker’s point of view, it is important to estimate the size, transmission mechanism and character of impact of public  investment  in  short  and  long  horizons,  in  order to be able to design relevant and  effective fiscal policy. Thus, this paper analyzes the developments of public investment in Armenia, and implements estimation of the macroeconomic effects of public investment. The estimation has been done using two approaches: first, an empirical analysis has been performed using a simple OLS regression model and a structural VAR model, to show the historical effects between public investment and GDP based on information contained in actual data. Then,  using a DSGE model, the effects of public investment and its transmission channels were analyzed based on the structure of Armenian economy. Both empirical analysis and estimation with a structural model showed, that public investment  has  significant  positive  impact  on  RA GDP and other macroeconomic variables. Based on the estimation results, the paper end with recommendations about directions of fiscal policy in Armenia.

The aim of this paper is to derive and replicate the quantitative analysis done in the original work. After solving the model and defining the system of equations, the effects of an exogenous shock on technology on the main variables of the system – namely output, consumption, investment, hours of work, trade balance, interest rate and debt level – during the deviation of the original steady state until the convergence to the equilibrium are analyzed.

We develop a DSGE model incorporating a banking sector comprising 4 banks connected in a stylised network representing their interbank exposures. The micro-founded framework allows inter alia for endogenous bank defaults and bank capital requirements. In addition, we introduce a central bank who intervenes directly in the interbank market through liquidity injections. Model dynamics are driven by standard
productivity as well as banking sector shocks. In our simulations, we incorporate four different interbank network structures: Complete, cyclical and two variations of the core-periphery topology. Comparison of interbank market dynamics under the different topologies reveals a strong stabilising role played by the complete network while the remaining structures show a non-negligible shock propagation mechanism. Finally, we show that central bank interventions can counteract negative banking shocks with
the effect depending again on the network structure.

The Malaysian debt has been under scrutiny since the 1Malaysia Development Berhad (1MDB) scandal; placing pressure on the research for sustainable debt. The purpose of this article is to forecast the impact of waqf (Islamic pious foundation) financing expenditure on federal government debt in Malaysia. It is to ascertain whether waqf can be an alternative solution to government debt reduction. To perform this, the Neoclassical Dynamic Stochastic General Equilibrium (DSGE) model is adopted. The theoretical framework is developed by considering the history, tradition, culture, and political influence of waqf primarily in Muslim majority countries. It was also inspired by the European third sector framework. The result shows that federal government debt can be reduced when waqf finances federal government expenditure. This has several implications. For one, this study revives the cohesive government-waqf role in providing pure and mixed public goods without depending solely on governme...

We estimated a dynamic stochastic general equilibrium (DSGE) model based on the features of the Ghanaian Economy, then examined the persistent effects of world oil price and monetary policy shocks (money supply-interest rate induced) on economic growth in Ghana. It was realized that, a shock on interest rate leads to a sharp fall in prices which reflects the impact of the decrease in interest rate on the marginal cost. There is a paradoxical effect of a negative interest rate on total money supply. We also showed that a positive output shock has the same effect on consumption, investment, prices and wages as in the case of interest rate shock.

The purpose of this work is to examine the impact of external shocks on economic activity in DR Congo. Using a dynamic and stochastic general equilibrium model, the author simulates four main types of external shocks, namely: (i) the shock on the risk premium; (i) the shock on world inflation; (iii) the global productivity shock; (iv) the global monetary policy shock. Quarterly frequency data was used for the period from January 2005 to December 2017. The results suggest that external shocks leading to a slowdown in global demand have a significant impact on economic activity at the local level. Furthermore, the shock to the world interest rate does not seem to influence domestic economic activity, at least directly. This could be justified by the country's limited financial openness, international trade being the main channel for transmitting external shocks.

This paper evaluates the macroeconomic effects on the UK and the euro area of an increase in trade tariffs associated with Brexit, by simulating a dynamic general equilibrium model of the UK, the euro area, and the rest of the world (RW). Our results are as follows: first, the imposition of tariffs reduces UK exports and economic activity by a non-negligible amount; second, the macroeconomic costs for the UK are reduced if it decides unilaterally not to increase tariffs on imports from the euro area and to reduce those on imports from the RW; third, the macroeconomic costs are particularly high if the lower UK trade openness resulting from the imposition of tariffs reduces the UK's total factor productivity; and fourth, Brexit has negative, but quite limited, effects on euro-area economic activity.

We focus on the interaction of frictions both at the firm level and in the banking sector in order to examine the transmission mechanism of the shocks and to reflect on the response of the monetary policy to increases in interest rate spreads, using DSGE models with financial frictions. However, VAR models are linear and the solutions of DSGEs are often linear approximations; hence they do not consider time variation in parameters that could account for inherent nonlinearities and capture the adaptive underlying structure of the economy, especially in crisis periods. A novel method for time-varying VAR models is introduced. As an extension to the standard homoskedastic TVP-VAR, we employ a Markov-switching heteroskedastic error structure. Overall, we conduct a comparative empirical analysis of the out-of-sample performance of simple and hybrid DSGE models against standard VARs, BVARs, FAVARs, and TVP-VARs, using data sets from the U.S. economy. We apply advanced Bayesian and quasi-optimal filtering techniques in estimating and forecasting the models.

We focus on the interaction of frictions both at the firm level and in the banking sector in order to examine the transmission mechanism of the shocks and to reflect on the response of the monetary policy to increases in interest rate spreads, using DSGE models with financial frictions. However, VAR models are linear and the solutions of DSGEs are often linear approximations; hence they do not consider time variation in parameters that could account for inherent nonlinearities and capture the adaptive underlying structure of the economy, especially in crisis periods. A novel method for time-varying VAR models is introduced. As an extension to the standard homoskedastic TVP-VAR, we employ a Markov-switching heteroskedastic error structure. Overall, we conduct a comparative empirical analysis of the out-of-sample performance of simple and hybrid DSGE models against standard VARs, BVARs, FAVARs, and TVP-VARs, using data sets from the U.S. economy. We apply advanced Bayesian and quasi-optimal filtering techniques in estimating and forecasting the models.

The  recent  COVID-19  pandemic  has  come  at  an  overwhelming  cost  to  both  developed  and developing countries; Uganda is no exception. Despite having relatively few cases, the pandemic’s indirect effects arising from an economic contraction and global recession, as well as the direct effects through ill health and death, are likely to have a devastating impact on poverty levels and people’s livelihoods. This paper aims to forecast the distributional consequences of the crisis in terms of its effects on poverty and inequality, and to understand how certain policy responses to the crisis might help to offset those effects. Our findings indicate that the income losses from the crisis are severe, erasing poverty gains of the past 10 years, and reaching well beyond Kampala. Using  household-level  information  from  the  2016/17  Uganda  National  Household  survey,  we explore  four  different  transfer  schemes  that  the  government  might  use  to  offset  the  poverty consequences  of  the  crisis:  (i)  a  universal  transfer  to  all  households  based  on  their  adult equivalence size, but excluding households with income from employment in the public sector or a  public  sector  pension;    (ii)  a  transfer  of  the  same  size  as  in  (i),  but  targeted  to  only  those households that were poor before the crisis began; (iii) an expansion of the SAGE grant to all those 65 years old and older; and (iv) a labor-intensive public works program directed at the hardest hit urban areas.

This thesis focuses on macroeconomic modelling of the labour market using Dynamic Stochastic General Equilibrium (DSGE) and Computable General Equilibrium (CGE) models. The first three chapters utilize DSGE models calibrated to the Dutch economy. Their main feature is the adoption of the Mortensen-Pissarides matching function approach. The final chapter constructs a CGE model to investigate the effects of fuel subsidies on Iran‟s labour market.

The first study develops a model that features two types of labour, high versus low skilled, who are differentiated according to educational attainment. The effects of overcrowding, technological change and the unemployment benefit are investigated. While biased technological change and overcrowding hurt low skilled workers, a higher unemployment benefit can help in alleviating these effects.

The subsequent chapter abstracts from educational attainment and features skill differentiation along worker productivity levels. The main feature is the presence of endogenous job destruction, which allows for a rich analysis of job creation and destruction rates. Wage rigidities, unemployment income and firing costs are incorporated. While lower unemployment income and higher firing costs reduce equilibrium unemployment, firing costs and deviations from the Hosios condition are the most important factors in explaining the labour market‟s cyclical properties.

The third chapter combines the features of the previous two studies to analyze the cyclical dynamics of workers with different educational levels. The analysis focuses on the “overeducated”: high skilled workers in simple jobs. They are shown to have unique cyclical properties, where their employment increases in a recession, thus overcrowding low skilled workers.

The final chapter switches focus to CGE modelling. The effects of fuel subsidies on the labour market in Iran are studied. Using a unique Social Accounting Matrix, the results show that reducing fuel subsidies can help in reducing unemployment only if the extra revenue is channelled towards additional Investment.

Since the 90s, the combination of the Real Business Cycle models, particularly the rational expectations and the optimizing behaviour aspects, with the New Keynesian frictions, have prompted the development of the Dynamic Stochastic General equilibrium (DSGE) models. The aim of the DGSE models is to help policy-making institutions with monetary policy analysis. The New Area-Wide Model (NAWM), a micro-founded and open-economy model developed by the European Central Bank to assist in macroeconomic projection and policy analysis, is a specific example of a DGSE model. This essay analyzes the model's development and the basis on which it is formed; describes how the model works, explaining which are the main characteristics and actors taken into consideration; and highlights possible problems or incompleteness, as well as positive elements, that arise in the NAWM. The New Area-Wide Model follows the Area-Wide Model (AWM), a traditional one used for over ten years in the European area. The main difference between the two models is the theories on which they base their structures. The AWM is designed to follow a long-run equilibrium based on the neo-classical economic theory. Meanwhile, in the short run the dynamics of demand are driven according to the Keynesian theories with prices and quantities that tend to adjust very slowly due to the dynamics of the aggregate demand and supply which are not observed in an optimization framework (Fagan, Henry, Mestre, 2004). In contrast, the NAWM is neo-classical in nature, focused on the intertemporal decisions of households and firms which are maximize expected lifetime utility and the flow of profits predicted. As a result, expectations in NAWM play a key role in influencing the adjustment dynamics of both quantities and prices already in the short run. (Christoffel et all. 2008) The basis of NAWM is formed by three models from which it takes its assumptions: The closed-economy model of the euro area by Smets and Wouters (2003), the International Monetary Fund's Global Economy Model (GEM; cf. Bayoumi, Laxton and Pesenti, 2004), and the Federal Reserve Board's new open economy model named SIGMA (cf. Erceg, Guerrieri and Gust, 2005). The NAWM has a more elaborate international block, which shows how the euro area projections are influenced by foreign economic activity, prices, and interest rates. The model has been developed in a scrupulous way with two different strategies: a calibrated one that relies on the assumption of the contemporary existence of two symmetric 2348326_ECON4080_1