TAYGAMS John Taylor’s Two-Country Model in GAMS

This paper , and its accompanying programs , show how to implement in GAMS (General Algebraic Modeling System) deterministic and stochastic simulations with linear macroeconomic models containing forward looking variables. Our general goals are: a) to provide a practical introduction to solution concepts for models containing forward looking variables b) to introduce the use of GAMS for solving dynamic linear models expressed as system of equations containing variables with leads and lags c) to introduce the use of GAMS for the implementation of stochastic simulations As a practical illustration of solution concepts and computational techniques, we use John Taylor’s two-country model, a small model with staggered contracts and forward looking variables which generates a rich pattern of dynamic behavior. Four simulations of progressive complexity are successively presented. For each of them, there is a corresponding program written in GAMS.