Write an Expression for the Firm’s Cash Flows - Economics Assignment Help

Assignment Task

Questions
Discuss the following points. Address the questions in Sections 2.2, 2.3 and 2.4 using MATLAB scripts.

Warm-up
1. Write an expression for the firm’s cash flows E∗.
2. What are the state and control variables?
3. Write the firm’s optimization problem with the sequential formulation (i.e. as an infinite sum).
4. Write the firm’s optimization problem recursively (i.e. with the Bellman equation).
5. We just have two states of the world ZL, ZH. How would you model a persistent productivity process in such a setting?

Simulate the model
1. Simulate the model for 40 periods and with a sample of 1000 firms, half of which start in the low productivity state. Save this sample for future use in Section 2.4.
2. Produce histograms of capital, debt, investment and operating income ZKα at the terminal date.
3. Interpret your findings.

Estimation
Use the sample you have simulated in Section 2.3 as your data. Pretend you know all the parameters in the model but ξ, which you want to estimate via the simulated method of moments.
1. Choose the moment to estimate ξ.
2. Use the simulated method of moments to compute ˆξ. Compare it with the true value ξ = 0.4.
3. Plot the objective function to minimize in the simulated method of moments as a function of ξ.

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