Cook 和 Devereux - 2016 - Exchange rate flexibility under the zero lower bou.pdf (1.5 MB)

1-s2.0-S0022199616300460-mmc1.pdf (143.6 KB)

Dear Professors and friends,

Hope you find the message well! I am trying to replicate the fig 8 in Cook and Devereux (2016) JIE paper with dynare. Here I’ve solved the optimal conditions for single currency area and use the MMC method to deal with the zero lower bound. In the paper we derived the result that preference shock epsilon_t enters natural rate of interest in eq. 12 and 15 (in difference. Here a markov process is assumed: (1-mu), but I would like to generally set the process of epsilon_t) and the law of motion of terms of trade in eq. 30 (in level).

Here is the question: if I do perfect_forecast with MMC method to deal the ZLB problem, aligned with your code in Gali 2015 ch5, I have to set the preference shock epsilon that pushes the home country into liquidity trap. In your code you let \bar{r}_t^n (directly) equals to -1 for 6 periods. But now with the 3-period preference shock I have to let eps = -1.5, -1.0, -0.5, 0, 0, 0,… such that \bar{r} = (coefficient) \times E_t(eps_{t+1} - eps_t) being negatively constant. I am confusing about it. Could you please help me the setting of preference shock?

Much appreciated!

David