Whoever has read the paper by Arce et al., please give me some advice on how to replicate shocks in the model; I would really appreciate it. How to get the outcomes displayed in figure 5, specifically. What are the simulation specifications for each of the model’s scenarios, to put it another way?
As I understand, the authors first impose a negative demand shock by increasing errBeta by (0.00864 or 0.00363), holding other shocks constant at zero, to simulate a recession environment. Right?
For scenario 1 (corridor system without QE), the authors do not impose any other shocks, letting the Taylor rule to respond to the decrease in inflation. Right?
For scenario 2 (Floor system), the authors initially (at time 0 before the shock) consider an initial balance sheet size of 5% of GDP (How do they specify this in the codes?)
For scenario 3 (corridor system with QE), starting from the same lean balance sheet as in scenario (1), the central bank implements a temporary bond purchase program. The authors assume that the central bank purchases bonds for 2 periods at a speed of 1% of steady state GDP per quarter, reinvests for one period, and then lets its bond portfolio mature; this path for bond holdings is announced contemporaneously to the crisis shock. I believe that this is related to the gov’t bond holdings by the CB equation, but I’m wondering how do they specify this in the codes?
The authors choose the size of the shock –common to all scenarios –such that the ELB constraint binds for 10 quarters under scenario (1)” (How? As I understand, this is related to errMP. But what is the value of the shock?)
Thank you so much,
ReplicationFiles.zip (6.7 KB)
Scenarios.pdf (323.4 KB)