This Website presents a collection of dynamic macroeconomic models solved with Microsoft Excel®. Dynamic macroeconomic models, perhaps with the only exception of the Solow growth model, have a number of technical difficulties that prevent being taught in undergraduate economics courses. In this Website, we present a collection of spreadsheets for solving a variety of dynamic macroeconomic models in discrete time numerically using, as a computer tool, a Microsoft Excel® spreadsheet. The collection of models includes dynamic macroeconomic models with rational expectations, both non-microfounded and microfounded. Models are solved using a computational approach that facilitates the learning and usage of dynamic macroeconomic models in undergraduate advanced macroeconomics courses. In particular, we present two alternative simple methods in Excel for solving dynamic general equilibrium models, which have become the principal tool for macroeconomic analysis nowadays, at an undergraduate level. Models solved in Excel include a dynamic IS-LM model, the Dornbusch model of exchange rate overshooting, the basic household’s maximization problem, the household’s maximization problem with labor supply, the Tobin’s Q model, the basic Real Business Cycle (RBC) model, an RBC model with Specific-Investment Technological Change (ISTC), the Solow growth model, and the Ramsey optimal growth model.
Two alternative methods are used for solving dynamic macroeconomic models in Excel. The first one consists of using the Solver tool included in Excel for solving micro-founded models in which some economic agent objective functions must be maximized. Although this approach offers a simple way to solve models – we only need to directly introduce in the spreadsheet the initial equations of the models, and no analytical solution is needed – this method suffers from the “black-box” problem, just like other more advanced codes and software available for solving these type of models. The second method consists of numerically simulating the model, by simply introducing the equations in Excel and calibrating the exogenous variables and parameters of the models once the model has been log-linearized. For micro-founded dynamic macroeconomic models where non-linearities appear, the model must first be solved analytically and linearized before numerically simulating directly in the spreadsheet. In this second method, no computer optimization algorithm is needed.
This Website is intended to be used as a resource in advanced macroeconomics courses or in intermediate macroeconomics courses with a strong mathematics prerequisite. The proposed solution methods try to keep the math level to a minimum, even though solving dynamic macroeconomic models requires some basic knowledge of linear algebra (i.e., matrices, difference linear equations systems, eigenvalues), and optimization (i.e., first-order conditions from a Lagrange auxiliary function). Similarly, computer language skills are reduced to the knowledge of the basic functionality of Excel. The main objective of this Website is to offer a spreadsheet-based method for numerically solving dynamic macroeconomic models, including Dynamic General Equilibrium models, without the requirement of learning computing languages as MatLab or R. The reason why we use a spreadsheet like Microsoft Excel is because this software is easy to learn and is already well known, at least to some degree, by students. For each model, a note is included with a description of the solution for each model, plus a short guide showing how the model has been taken to Excel, indicating the cells in which have been specified the parameters, the exogenous variables, and the equations of the model for the endogenous variables. In addition, we include a shortlist of exercises with some simulations that can be carried out using Excel spreadsheets. A description of the methods for solving dynamic macroeconomic models with Excel can be found in Bongers, A., Gómez, T. and Torres, J.L. (2020): Teaching Dynamic General Equilibrium models to undergraduates using a spreadsheet. International Review of Economic Education, 35(4), 1-11.
For those interested in the teaching of macroeconomics using Excel, an outstanding reference is: Barreto, H. (2016). Teaching Macroeconomics with Microsoft Excel®. Cambridge University Press.
For those interested in the teaching of Dynamic General Equilibrium models at the undergraduate level see: Solis-García, M. (2018). The Macro Pedagogy Debate: Teaching DSGE to Undergraduates Symposium: Yes we can! Teaching DSGE models to undergraduate students. Journal of Economic Education, 49(3): 226-236.
Citation of this webpage: Bongers, A., Gómez, T. and Torres, J.L. (2021): Dynamic Macroeconomic Models with Excel. Journal of Economic Education, 52(4), 372.