The title of this chapter is the same as the title of a paper that
can be read or downloaded from this site:
Fed Policy and the Effects of a Stock Market Crash on the Economy.
If you are interested in this subject, you should read this paper
before reading this chapter. The paper uses the MC2 model to analyze
Asiatype crises. The two experiments in this paper
("No Boom" and "Crash") can be duplicated
on this site. The following are the steps necessary to duplicate the
first experiment, the "No Boom" experiment.
 Click "MC2 Model" in the left menu and
type in M2ABASE with a password of MCBASE to be copied to a dataset you have
named. (Do not use the default MC2BASE as the base dataset.)
 Click "Set prediction period" and set the period to be
1995 through 2004.
 Click "Drop or add equations" and for Japan add the I and
RS equations and for Australia add the L2 equation. (These three
equations are dropped for the forecast, which is the default case,
and so they need to be added back in for this experiment.)
Also, for the United States drop the LM, CG, and RS equations (equations
8, 25, and 30). (The CG and RS equations are dropped because of the
nature of the experiment; the LM equation is dropped because it appears
to be seriously misspecified.)
 Click "Use historical errors" and set the option to use
the historical
errors.
 Click "Change exogenous variables" and ask to change RS
for the United States. Then enter the bill rate values under "No Boom" in
Table 3 of the paper. Then ask to change CG for the United States, and
ask to replace each existing value with 521.28 (this is a quarterly
rate of 130.32, which is used in the paper).
Be sure to save the changes once you are done.
 Click "Solve the model and examine the results".
Once the model is solved you can examine the results. If you have set the
experiment up correctly, the comparisons between your dataset and
M2ABASE of GDPR, real GDP for the United
States at an annual rate,
will match the results in Table 4 of the paper,
subject to some rounding error. (The rounding error primarily affects
the predictions for 2003 and 2004.)
You can, of course,
examine many more variables than are presented in the paper.
The following are the steps necessary to run the second experiment,
the "Crash" experiment.
 Click "MC2 Model" in the left menu and
type in M2ABASE with a password of MCBASE to be copied to a dataset you have
named. (Do not use the default MC2BASE as the base dataset.)
 Click "Set prediction period" and set the period to be
1999 through 2004.
 Click "Drop or add equations" and for Japan add the I and
RS equations and for Australia add the L2 equation. (These three
equations are dropped for the forecast, which is the default case,
and so they need to be added back in for this experiment.)
Also, for the United States drop the LM, CG, and RS equations (equations
8, 25, and 30). (The CG and RS equations are dropped because of the
nature of the experiment; the LM equation is dropped because it appears
to be seriously misspecified.)
 Click "Use historical errors" and set the option to use
the historical
errors.
 Click "Change exogenous variables" and ask to change RS
for the United States. Then for the 1999:32004:4 period
enter 3.0 for the bill rate values. Leave the base values for
1999:1 and 1999:2 unchanged. Then ask to change CG for the United States, and
enter 33598.8 for 1999:3 (this is a quarterly rate of 8399.7, which is
used in the paper). Leave the other values unchanged.
Be sure to save the changes once you are done.
 Click "Solve the model and examine the results".
