|2. Estimated Inflation Costs Had European Unemployment Been Reduced in the 1980s by Macro Policies|
|The title of this chapter is the same as the title of a paper that
can be read
or downloaded from this site:
Estimated Inflation Costs Had European
Unemployment Been Reduced in the 1980s by Macro Policies.
If you are interested in this subject, you should read this paper
before reading this chapter. The paper uses the MC1 model to estimate the
an easier German monetary policy in the 1980s. It is easy to duplicate the experiment in
the paper on this site, and the following are the steps necessary to do so.
Once the model is solved you can examine the results. If you have set the experiment up correctly, your comparisons (between your dataset and MCBASE) will match the comparisons in Table 1 in the paper, subject to slight rounding error. You can, of course, examine many more variables and periods than are presented in Table 1.
This is a nice example for learning some of the features of the MC1 model and for learning how to work with it. Once you have mastered this experiment, you may want to perform others to examine what else macro policies might have done in the 1980s to reduce European unemployment and at what price level and inflation costs.
Note that the use of the historical errors is important. As discussed in the paper, this allows the perfect tracking solution to be the base path, from which changes can then be made. If you did not use the historical errors, you would have to first create a base path of predicted values, which the new predicted path (after the interest rate changes) would be compared. See Section 2.6 of The US Model Workbook for more discussion of this.