Dynare code for DSGE-model news shock

Stochastic simulations
1

Dear community,

I am new to dynare and therefore my question may be to straightforward:
I want to simulate a negative technology news shock in the classical DSGE-model which happens after 4 periods. I belive, this shock will lead to a drop of the natural interest rate. That is my ultimate goal at the end of the simulation.
What do I need to change if I use the exact Gali 2008 model: https://github.com/JohannesPfeifer/DSGE_mod/blob/master/Gali_2008/Gali_2008_chapter_3.mod
Which equations and which definitions have to be replaced or added to the model?

Thank you so much for your help!

2

You need to replace
a=rho_a*a(-1)+eps_a;
by
a=rho_a*a(-1)-eps_a(-4);

3

Dear Mr Pfeifer,

thank you very much! It worked as I have expected.

Very best

4

Dear Mr Pfeifer,

I implemented the shock and it worked as it should. The thing is, I hoped the natural interest rate would sink, when implementing the technology news shock. Unfortunatly, it sinks for as long as the shock is only anticipated, but when it happens, the natural interest rate goes up again. What do I need to alter in the model and in the code to make the natural interest rate stay at a level below zero for some periods longer,even better for a long time?
Thank you so much!

5

You need to think about the intuition behind the IRFs. An anticipated technology shock means that it makes sense to not work today when technology is low. That means equilibrium labor should be low today and high in the future (substitution effect). At the same time, there should be an income effect: agents consume more of the consumption good and of leisure. However, we know that once TFP goes up, consumption will jump up. That means the consumption path is increasing. The Euler equations then requires a higher interest rate (above the rate of time preference). Those effects should determine the movement of the interest rate in the flex-price economy.

6

Thank you for your answer!
does this mean, that the natural interest rate will be only low while the individuals expect the technology to drop? Would an additional expansionary monatary policy shock (simultainously with the negative technology news shock) keep the natural interest rate down? I belive, expansionary monatary policy should enhance the effect of a low natural interest rate even after the actual negative technology shock has taken place. How do I combine this shocks in dynare for them to happen at the same time?
Thanks again!

7

It’s not my model so I have no idea what is going on in your model. I only pointed out that you should think hard about the economics of the problem and provided you with my understanding of what would happen after a positive news shock about TFP in an RBC model .