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Monetary and Fiscal Policy FP7 Project

This project foresees to contribute to the evaluation of macroeconomic policy by advancing the analysis of optimal fiscal and monetary policy in monetary union such as the European one. This work will result in the addition of new numerical tools, specially designed for the computation of optimal policy in large macroeconometric models. Such multicountry models are necessary to take into account the diversity of the countries making now the European Union.

These new tools for the computation of optimal policy will be added to DYNARE, a public domain platform for the simulation and estimation of dynamic stochastic general equilibrium models (DSGE), that is increasingly used in policy making institution and in academic research alike.

New model developments are focused around the contribution of optimal fiscal policy to smooth shocks in a union of heterogeneous countries with rigidities in labor and financial markets. Special attention is given to the dynamics of public debt in such environment.

Systematic models comparison will be made possible through the building of a database of macroeconomic models currently in use in policy making institutions around the world.

New numerical tools will be added to DYNARE that provide for the computation of optimal policy, either under commitment, in a timeless perspective or under discretion, for a very general class of nonlinear models. Particular attention will be given to correct linear quadratic approximation of these problems. Extensions will be made to the partial information case. These tools shall also permit to perform Bayesian estimation of these models under the assumption that the policies followed were optimal. Special emphasis is placed on the definition of priors.Given the complexity of the numerical computations, increasing the speed of computation and the development of parallel algorithms. is an important part of the project .

Altogether, this project should represent a very significant step forward towards better models and better tools for the formulation of macroeconomic policies.