Macroeconomic Interdependence in a Two-Country DSGE Model under Diverging Interest-Rate Rules



7. Impulse-Response Analysis

impulses in period 1 on the exogenous error terms ηa, η*, ηu, ηU, ηv V in terms of one standard deviation
of +л/0Л on their expected value of 0. The impulse-response analysis is carried out by employing the
Dynare package for Matlab while simulating over 2100 periods.28 For the Dynare program code see
Appendix A.6.

The six figures below show the responses of the output gaps x, x*, PPI inflation rates πH, ∏F, movements
in the TOT ∆
t, nominal interest rates i, i*, and the relevant shock variables themselves to (orthogonalized)
impulses on the various exogenous error terms for a time range of 40 periods or 10 years.
29



x 10—4      Pi_f

151-----■------—


-51------------■-------------■-------------■-------------

10   20   30   40


Figure 1: Responses to an impulse on the domestic productivity shock


28The software is downloadable from http://www.cepremap.cnrs.fr/dynare/. For all computations associated with the
impulse-response analysis it uses the pure perturbation algorithm developed by Schmitt-Grohe/Uribe (2004, pp.
764-765) as its default option.

29Note that the following is assumed for the variance-covariance matrix of the various exogenous error terms:

-I

σ 2
ηa

0

0

0

0

0

0

σ 2 *

0

0

0

0

η*

σ2
ηu

V ar(η) =

0

0

0

0

0

0

0

0

σ2i

0

0

ηiu

σ2
ηv

0

0

0

0

0

0

0

0

0

0

σ2i
σηvi

22



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