Search Results
Working Paper
Policy predictions if the model doesn’t fit
This paper uses a novel method for conducting policy analysis with potentially misspecified DSGE models (Del Negro and Schorfheide 2004) and applies it to a simple New Keynesian DSGE model. We illustrate the sensitivity of the results to assumptions on the policy invariance of model misspecifications.
Working Paper
Forming priors for DSGE models (and how it affects the assessment of nominal rigidities)
In Bayesian analysis of dynamic stochastic general equilibrium (DSGE) models, prior distributions for some of the taste-and-technology parameters can be obtained from microeconometric or presample evidence, but it is difficult to elicit priors for the parameters that govern the law of motion of unobservable exogenous processes. Moreover, since it is challenging to formulate beliefs about the correlation of parameters, most researchers assume that all model parameters are independent of each other. We provide a simple method of constructing prior distributions for a subset of DSGE model ...
Journal Article
DSGE model-based estimation of the New Keynesian Phillips curve
This paper surveys estimates of New Keynesian Phillips curve (NKPC) parameters that have been obtained by fitting fully specified dynamic stochastic general equilibrium (DSGE) models to U.S. data. We examine various sources of identification in the context of a simple analytical model. DSGE model-based NKPC estimates tend to be fragile and sensitive to the model specification, in particular if marginal costs are treated as an unobserved variable. Estimates of the NKPC slope lie between 0 and 4. If the observations span the labor share, which is in most instances the model-implied measure of ...
Report
Dynamic prediction pools: an investigation of financial frictions and forecasting performance
We provide a novel methodology for estimating time-varying weights in linear prediction pools, which we call dynamic pools, and use it to investigate the relative forecasting performance of dynamic stochastic general equilibrium (DSGE) models, with and without financial frictions, for output growth and inflation in the period 1992 to 2011. We find strong evidence of time variation in the pool?s weights, reflecting the fact that the DSGE model with financial frictions produces superior forecasts in periods of financial distress but doesn?t perform as well in tranquil periods. The dynamic ...
Discussion Paper
Forecasting the Great Recession: DSGE vs. Blue Chip
Dynamic stochastic general equilibrium (DSGE) models have been trashed, bashed, and abused during the Great Recession and after. One of the many reasons for the bashing was the models’ alleged inability to forecast the recession itself. Oddly enough, there’s little evidence on the forecasting performance of DSGE models during this turbulent period. In the paper “DSGE Model-Based Forecasting,” prepared for Elsevier’s Handbook of Economic Forecasting, two of us (Del Negro and Schorfheide), with the help of the third (Herbst), provide some of this evidence. This post shares some of our ...
Working Paper
DSGE model-based forecasting of non-modelled variables
This paper develops and illustrates a simple method to generate a DSGE model-based forecast for variables that do not explicitly appear in the model (non-core variables). The authors use auxiliary regressions that resemble measurement equations in a dynamic factor model to link the non-core variables to the state variables of the DSGE model. Predictions for the non-core variables are obtained by applying their measurement equations to DSGE model- generated forecasts of the state variables. Using a medium-scale New Keynesian DSGE model, the authors apply their approach to generate and evaluate ...
Working Paper
Learning and monetary policy shifts
This paper estimates a dynamic stochastic equilibrium model in which agents use a Bayesian rule to learn about the state of monetary policy. Monetary policy follows a nominal interest rate rule that is subject to regime shifts. The following results are obtained. First, the author's policy regime estimates are consistent with the popular view that policy was marked by a shift to a high-inflation regime in the early 1970s, which ended with Volcker's stabilization policy at the beginning of the 1980s. Second, while Bayesian posterior odds favor the "full-information" version of the model in ...
Discussion Paper
Choosing the Right Policy in Real Time (Why That’s Not Easy)
As an economist, you make policy recommendations at any point in time that depend on what model of the economy you have in mind and on your assessment of the state of the economy. One can see these points play out in the current discussion about the timing of interest rate liftoff and the speed of the subsequent renormalization. If you think nominal rigidities are not all that important, you are likely to conclude that accommodative policies won’t do much for growth but will generate inflation. Similarly, if you are convinced that the economy is already firing on all cylinders, you may see ...
Report
Forming priors for DSGE models (and how it affects the assessment of nominal rigidities)
This paper discusses prior elicitation for the parameters of dynamic stochastic general equilibrium (DSGE) models and provides a method for constructing prior distributions for a subset of these parameters from beliefs about the moments of the endogenous variables. The empirical application studies the role of price and wage rigidities in a New Keynesian DSGE model and finds that standard macro time series cannot discriminate among theories that differ in the quantitative importance of nominal frictions.
Working Paper
Priors from general equilibrium models for VARs
This paper uses a simple New Keynesian monetary DSGE model as a prior for a vector autoregression and shows that the resulting model is competitive with standard benchmarks in terms of forecasting and can be used for policy analysis.