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Modeling and Implementation of Optimal Fiscal and Monetary Policy Algorithms in Multi-Country Econometric Models (MONFISPOL)
Start date: Oct 1, 2008, End date: Sep 30, 2011 PROJECT  FINISHED 

"This project contributes to the evaluation of macroeconomic policy by advancing the analysis of optimal fiscal and monetary policy in monetary union such as the European one. This work will result in the addition of new numerical tools, specially designed for the computation of optimal policy in large macro-econometric models. Such multi-country models are necessary to take into account the diversity of the countries making now the European Union. These new tools for the computation of optimal policy will be added to DYNARE, a public domain platform for the simulation and estimation of dynamic stochastic general equilibrium models (DSGE), that is increasingly used in policy making institution and in academic research alike. New models are proposed to analyze the contribution of optimal policy to smooth shocks in a union of heterogeneous countries with rigidities in labor and financial markets. In that framework, special attention is given to the dynamics of public debt. Systematic models comparison is made possible thanks to a database of macroeconomic models currently in use in policy making institutions around the world. New numerical tools are added to DYNARE that provide the computation of optimal policy, either under commitment, in a timeless perspective or under discretion, for a general class of nonlinear models. Particular attention is given to correct linear quadratic approximation of these models. Extensions are proposed to deal with partial information. These tools shall also permit to perform Bayesian estimation of models under the assumption that the policies followed were optimal. Special emphasis is placed on the definition of priors. Given the complexity of the numerical computations, we stress speed of computation and the development of parallel algorithms. Altogether, this project should represent a very significant step forward towards better models and better tools for the formulation of macroeconomic policies."
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