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Dear all,
I have a few questions about the use of OLR:
1) Does anybody have a simple example to look up? I don't quite understand how the .mod file should be structured.
2) What is the output of the code? IRFs to the shocks under optimal policy?
3) Is the choice of an "instrument" arbitrary (at least in some cases)? If I think of, say, Woodford's textbook model, I can specify the "instrument" as any endogenous variable, right?
Thanks,
Andrea

endi75 wrote:1) Does anybody have a simple example to look up? I don't quite understand how the .mod file should be structured.

I attach a simple example

2) What is the output of the code? IRFs to the shocks under optimal policy?

regular output of a model but under optimal policy. The model is augmented with Lagrange mulipliers

3) Is the choice of an "instrument" arbitrary (at least in some cases)? If I think of, say, Woodford's textbook model, I can specify the "instrument" as any endogenous variable, right?

I don't understand the notion of instrument in the context of the Optimal Linear Regulator, sorry.

Best

Michel

Dear Michel,
Thanks for your answer. I think it clarifies most of my doubts. My point about the "instrument" was exactly what is the concept of an instrument in the context of OLR. In your example, the interest rate is declared as the instrument (olr_inst r). My question basically is whether I can specify, say, inflation as the instrument or there are restrictions due to the nature of the endogenous variables (e.g. cannot specify forward looking variables as instrument). I guess I can try with your example but if you have a general answer I'll be glad to hear it.
Best,
Andrea

I get it now. No, there is no limitation on the type of variable that is chosen for instrument. I can imagine that in some cases, you wouldn't obtain a unique stable trajectory, but I don't have the theory for it.

Best

Michel