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?
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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?
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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?
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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?)
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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?
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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)