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Hall and Taylor´s and John Taylor´s Model in DUALI

Mercado, Ruben and Kendrick, David (1998): Hall and Taylor´s and John Taylor´s Model in DUALI.

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This paper, and its accompanying programs, provide a practical introduction to macroeconomic policy analysis methods and show how to implement in DUALI deterministic and stochastic simulations with standard and rational expectations models. The analysis of the general properties of dynamic economic systems is a complex task, facilitated by the application of some theoretical results and relatively simple simulation techniques. Dynamic optimal policy analysis is more demanding, usually requiring of specialized software. DUALI is an optimal control software which is able to generate sophisticated deterministic and stochastic simulation environments and to compute, among other things, the optimal feedback rule and the implied optimal paths for target variables and policy tools. Our general goals here are: a) to introduce the use of some concepts for the analysis of dynamic properties of economic systems b) to introduce the use of DUALI to perform deterministic and stochastic dynamic optimal policy analysis. As a practical illustration of solution concepts and computational techniques, we use Robert Hall and John Taylor’s open economy-flexible exchange rate model, and John Taylor’s closed economy model with rational expectations and staggered contracts.

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