Answer Happy

2. Figure 1 illustrates the impulse responses to a highly-persistent (i.e., with a first-order autoregressive parameter equal to 0.9) positive technology shock of one standard deviation (SD) ) normalised to one percentage point (pp) in the basic New Keynesian (NK) model under a Taylor rule. Do we see partial 25/01/2021 University of Reading EC302 2020/21 Exam Paper - Questions 2/10 “accommodation" of the shock by the monetary authority: in which three panels of the figure, and why? (25 marks) Basic NKM-CLIRR. Ch. 3. Gali (2008) IRFs to an Expansionary Technology Shock of 1 SD = 4 pp (annualized) Output Gap Inflation (annualized) () Nominal Interest Rate (annualized) 0 -0.1 -0.5 -0.5 -0.2 0 5 15 20 . 1 0 20 -1 0 20 10 Real Output 5 10 16 Natural Real Output 5 10 15 Real Interest Rate (annualized) 1 1.5 0 1 0.5 -02 0.5 0 0 -0.4 0 20 5 10 15 20 0 5 10 15 20 Natural Real Interest Rate (ized) 0 5 10 16 Red Money Belices Nominal Money Growth (annualized) 2 10 -0.2 5 1 -0.4 0 0 5 10 15 20 20 0 5 10 15 20 Employment 0 0 5 10 15 x 10" Row Marginal Cost 1.5 Technology Shock 0 1.5 1 1 -0.1 0.5 05 -0.2 5 10 15 20 0 0 0 5 15 20 0 0 5 15 10 Quarters Qw 10 Quare Figure 1: Impulse responses to a persistent expansionary technology shock (bottom-right graph) in the basic NK model, % deviation from steady state Source: The basic NK model under the "baseline calibration" in Gali's (2008) textbook, p. 52, simulated using Dynare/Matlab and discussed during our lectures and classes.