Welfare Analysis

Hello Dynare Users,

I am new to welfare analysis and it is my understanding that this can be done in Dynare as long as we set order = 2 and simulate for a long period say periods = 100,000. I would like to perform standard unconditional welfare analysis in a DSGE model that I have estimated using Bayesian estimation. My model has five fiscal rules and nine shocks. I would like to compute the unconditional welfare after each shock so that I can determine if there is a welfare gain or loss.

According to the threads on this topic, it is my understanding that I have to declare a utility and welfare function within the model block and then compare the steady state value of welfare to the mean of welfare found in oo_. I do this and I obtain a mean value of 80.84 and a steady state value of 0 which implies a welfare gain. I am confused because I do not know which shock this pertains to?

Could someone kindly advise. Many thanks in advance.
soe_open_params.mod (17.6 KB)

I don’t understand the exercise you are trying to conduct. What do you mean with “welfare after a shock”? A realized shock is shifting the mean. You can simply look at the IRF of welfare.

Note also that if you are interested in welfare, your exercise is not 100% clean. Your estimated parameters are based in a first order approximation while welfare will be based on a second order approximation of the model. Unfortunately, that is often the best we can do.