Simulate a model with time-varying parameters

[andrewsun90]

Dear all,

I was trying to simulate a model with time-varying parameters in Dynare. From this post

Deterministic time varying parameters

Dear friends, Is Dynare capable of handling deterministic time varying parameters? For example, my model (linear) have an equation of the following type, X(t) = alpha(t)*y(t)+beta(t)*z(t), Where x, y, and z are variables and alpha and beta are known parameters (known even for the future). One way would be treat the parameters as variables, but, in this case the model wouldn’t be linear anymore. Besides that, in order to forecasting, all forecasts would have to be conditional on these parame…

it seems that we can obtain the model simulation under perfect foresight assumption. Suppose I want to build a three-equation linearised NK model where the only time-varying parameter is phi_pi, the response of the nominal interest rate to the rate of inflation deviating from its steady state. From t = 1, …, 10, phi_pi = 1.5 and from t = 11, …, 20, phi_pi = 2. This information is known to all at t = 1 (thus a ‘perfect foresight’). Does anyone know how to really make simulations and probably obtain corresponding policy functions in a model like this? Thanks a lot in advance!

Andrew

[stepan-a]

Dear Andrew,

You can treat \varphi_{\pi} as an exogenous variable, setting its path in the shocks block and postulating a steady state level equal to 2. I do not really understand the last part of your question… What would be the use of a policy function (it would be conditional on the scenario for the path for \varphi_{\pi, t})?

Best,
Stéphane.