This document outlines exercises using Dynare to analyze a simple New Keynesian model. The exercises explore the rationale for the Taylor principle, potential conflicts between monetary policy channels, the sensitivity of inflation and output to shock persistence, cases when the Taylor rule does not adjust interest rates enough, and instances when news shocks cause the Taylor rule to move rates in unintended directions.

1. Dynare Exercise

2. Outline
• Review Dynare syntax
• Exercises with simple NK model
– Rationale for the Taylor principle.
– Potential conflict between working capital channel
and Taylor principle.
– Sensitivity of dynamic response of inflation and
output gap to persistence of shock.
– In examples when Taylor rule moves the interest rate
in the right direction, does not move it far enough.
– The Taylor rule may push the interest rate in the
wrong direction when there are news shocks.