DRE 7020 Regime-Switching DSGE modeling in RISE

Responsible for the course
Hilde C Bjørnland, Junior Maih

Department of Economics

According to study plan

ECTS Credits

Language of instruction

Regime switches are ubiquitous in economic data and can no longer be ignored in policy discussions. In a world with sometimes abrupt changes in uncertainty, breakdowns of economic structures and policy shifs (e.g unconventional policies), agents have to take into account the possibility of such events reoccurring.

This course will provide you with the necessary tools to analyse regime switches in economics.

Learning outcome
Course participants will gain :

The course covers a range of tools for solving and estimating Dynamic Stochastic General Equilibrium (DSGE) models in which parameters (or more general regimes) change subject to a switching process that is potentially endogenous. The course will be based on the Rationality In Switching Environments (RISE) Toolbox.

The problems tackled by these tools are for the most part nonstandard, computationally challenging and massively difficult to solve.Solving those, however, will equip you with the necessary tools to address important economic and policy-relevant issues. The good news is that recent advances in solution methods make it easy for anybody with a basic knowledge of DSGE modeling to solve an estimate regime-switching DSGE ( RS-DSGE) models without being a programmer.

This is what you will learn here.

Admission to a PhD Programme is a general requirement for participation in PhD courses at BI Norwegian Business School.
External candidates are kindly asked to attach confirmation of admission to a PhD programme when signing up for a course with the doctoral administration. Other candidates may be allowed to sit in on courses by approval of the course leader. Sitting in on courses does not permit registration for courses, handing in exams or gaining credits for the course. Course certificates or conformation letters will not be issued for sitting in on courses

To be considered for admission to the course, applicants must be familiar with ;
- Constant-parameter DSGE modeling
- basic econometrics
- linear algebra

In addition to those requirements
- basic programming in Matlab would be a valuable asset

All accepted participants will be required to successfully run a SIMPLE piece of Matlab code on their laptop. This is merely to ensure that all programs are working as expected and that we do not waste time debugging codes during hands-on sessions.

Compulsory reading
Canova, F. 2007. Methods for Applied Macroeconomic Research. Princeton University Press, Princeton, New Jersey, illustrated edition
Costa, O.L.D.V., Fragoso, M.D. and Marques, R.P. 2005. Discrete-Time Markov Jump Linear Systems. Springer
Kim, C.J. and Nelson, C.R. 1999. State-Space Models with Regime Switching. The MIT Press, Cambridge, Massachusetts

Alstadheim, R, Bjørnland, H.C and Maih, J. 2013. Do central banks respond to exhange rate movements? A markov-switching structural investigation. Working paper Norges Bank, 24
Amisano, G and Tristani, O. 2011. Ecact likelihood computation for nonlinear dsge models with heteroskedastic innovations. Journal of Economic Dynamics and Control, 25(2) : 2167-2185
Binning, A.J. and Maih, Junior. 2015. Sigma point filters for dynamic for nonlinear regime switching models. Working paper forthcoming, Norges Bank
Debortoli, D., Maih, J., and Nunes, R.. 2014. Loose commitment in medium-scale macroeconomic models: Theory and applications. Macroeconomic Dynamics, 18(1) :175-198
Farmer, R.F., Waggoner, D.F., Zha, T.. 2009. Understanding Markov-Switching Rational Expectations Models. Journal of Economic Theory, 25(12) : 2150-2166
Liu, C., Waggoner, D.F., and Zha,T. 2011. Sources of Macroeconomic fluctations: A regime-switching dsge approach. Quantitative Economics 2(2) : 251-301
Lubik, T.A. and Schorfheide, F. 2004. Testing for indeterminacy: An application to u.s. monetary policy. American Economic Review, 94(1) :190-217
Sims, C.A., Waggoner, D.F., and Zha, T.. 2008. Methods for inference in lange multiple-equation markov-switching models. Journal of Econometrics, 146(2) : 255-274

Recommended reading

Course outline
1. Local approximation
2. Optimal Policy with Regime Switches
3. Esitmation of linear RS.DSGE models
4. Estimation of nonlinear RS-DSGE models
5. Global sensitivity analysis

Computer-based tools
Applicants must have their own laptops with the following programs installed :
- optimization toolbox
- statistics toolboks
RISE toolbox : free
Oxedit (optional): A free version exists

Learning process and workload
A course of 3 ECTS credits corresponds to a workload of 80-90 hours.
Lectures: 15 h.

Coursework requirements

An individual assignment consistent of maximum 15 pages. Graded pass/fail.
Examination code(s)
DRE 70201 Course paper counts for 100 % of the final grade in the course. The gradescale is pass/fail

Examination support materials
Exam aids at written examinations are explained under exam information in our web-based Student handbook. Please note use of calculator and dictionary.

Re-sit examination
Re-takes are only possible at the next time a course will be held. When the course evaluation has a separate exam code for each part of the evaluation it is possible to retake parts of the evaluation. Otherwise, the whole course must be re-evaluated when a student wants to retake an exam.

Additional information
Honour Code
Academic honesty and trust are important to all of us as individuals, and represent values that are encouraged and promoted by the honor code system. This is a most significant university tradition. Students are responsible for familiarizing themselves with the ideals of the honor code system, to which the faculty are also deeply committed.

Any violation of the honor code will be dealt with in accordance with BI’s procedures for cheating. These issues are a serious matter to everyone associated with the programs at BI and are at the heart of the honor code and academic integrity. If you have any questions about your responsibilities under the honor code, please ask.