The Sensitivity of Solutions to Terminal Conditions: Simulating Permanent Shocks with Quest II

Abstract

In applied economic modelling work one is often interested in the long run effects of certain policy measures. An example of this is the evaluation of the potential benefits of certain structural economic reforms, such as changes in taxation or the removal of trade barriers, on output and employment. Another example is the long run impact of monetary shocks on the price level, which constitutes a simple test of money neutrality in a model.