Browsing by Subject "DSGE"

The cross-country co-movements of economic variables have been documented in the macroeconomic research. This phenomenon has puzzled researchers in the field of dynamic stochastic general equilibrium (DSGE) models because the early DSGE models have had challenges in replicating the co-movements of outputs. The thesis approaches the cross-country co-movements of output cycles in DSGE models by introducing correlation to technology shocks. The objective is to study if the correlation in the technology shocks enhances the model's ability to capture the cross-country correlations of empirical data. The thesis presents a two-country DSGE model that is constructed using the results of Galí and Monacelli (2005). The original model of Galí and Monacelli is a small-country model, and in the thesis it is demonstrated how the model is re-constructed as consisting of two large economic regions. Another important modification to the original model is that the thesis presents a distinctive shock process that allows the technology shocks to correlate. This is done by adding a foreign technology shock variable to the domestic technology shock process. The final model is presented as a system of thirteen equations and, as a solution to the system, the dynamics of the model are observed. The results from the model show that the two-country model with correlated shock processes is able to replicate the cross-country correlations of empirical data well. This result is compared to the benchmark model with no shock correlations and the comparison reveals that although the benchmark model succeeds in replicating the cross-country correlations between inflations and nominal interest rates, it does not produce as high output gap correlation as the model with correlated shock processes. The difference between these models is caused by the distinctive shock processes. The technology shocks affect directly the potential output and the real output adjusts slowly as a response to the changes in the expectations. This causes the dynamics in the output cycle. The results of the thesis show evidence that introducing correlation between country-specific technology shocks can enhance the models ability to produce realistic cross-country output co-movements. This result should apply to other models that follow the framework of Galí and Monacelli. The generalization of the results could still be studied further. In addition, including new features to the model would allow for examination of wider variety of shocks.

This thesis examines the macroeconomic impact of Covid-19, constructing a DSGE model incorporating wage rigidity and consumption habit. This paper captures the characteristics of the Finnish economy, such as high wages and high consumption habits, and aims to analyze the macroeconomic impact of Covid-19 in Finland. Based on the New Keynesian DSGE model and combined with the SVAR method, focusing on the adverse effects of Covid-19 and analyzing how to mitigate its negative effects. After building the DSGE model, Bayesian estimation was performed using the parameters of Kilponen (2016) as the prior distribution, after which impulse response analysis was performed. At the same time, the effectiveness of fiscal policy and monetary policy is analyzed. The results of the empirical model support the conclusions in the theoretical model. The results show that the decline in utility due to insufficient consumption preferences significantly impacts consumption and output, causing aggregate consumption to decline and remain below steady-state levels for a long time. The level of labor supply is negatively affected by underconsumption. But the shock to consumer preference increased investment, offsetting some of the negative shock to output. Inflation and real interest rates also took a downward hit. Real interest rates first fall and then rise but remain below a stable level for a long time as the supply of capital rises when the demand for capital falls. A negative shock to technology causes aggregate consumption and aggregate output, and labor and capital goods to fall. In contrast, a fall in capital value causes Tobin's q to fall. Looking at the impact time of the impulse response, we find that the negative impact on macroeconomic variables is large and long-lasting. A positive government spending shock of one standard deviation would directly increase aggregate output, but its impact on output would be diminished. Compared with fiscal policy and monetary policy, the role of government spending is more likely to bring the economy into a stable state, and its response is more sensitive. We find that fiscal policy has a more significant impact on macroeconomic regulation; this suggests that monetary and fiscal policy need to work together in the context of high inflation and low interest rates. Fiscal policy drives economic recovery and can provide strong support for the realization of monetary policy.