Search Results
Working Paper
Non-stationary hours in a DSGE model
The time series fit of dynamic stochastic general equilibrium (DSGE) models often suffers from restrictions on the long-run dynamics that are at odds with the data. Relaxing these restrictions can close the gap between DSGE models and vector autoregressions. This paper modifies a simple stochastic growth model by incorporating permanent labor supply shocks that can generate a unit root in hours worked. Using Bayesian methods we estimate two versions of the DSGE model: the standard specification in which hours worked are stationary and the modified version with permanent labor supply shocks. ...
Working Paper
Evaluating DSGE model forecasts of comovements
This paper develops and applies tools to assess multivariate aspects of Bayesian Dynamic Stochastic General Equilibrium (DSGE) model forecasts and their ability to predict comovements among key macroeconomic variables. We construct posterior predictive checks to evaluate conditional and unconditional density forecasts, in addition to checks for root-mean-squared errors and event probabilities associated with these forecasts. The checks are implemented on a three-equation DSGE model as well as the Smets and Wouters (2007) model using real-time data. We find that the additional features ...
Report
Inflation in the Great Recession and New Keynesian models
It has been argued that existing DSGE models cannot properly account for the evolution of key macroeconomic variables during and following the recent great recession. We challenge this argument by showing that a standard DSGE model with financial frictions available prior to the recent crisis successfully predicts a sharp contraction in economic activity along with a modest and protracted decline in inflation following the rise in financial stress in the fourth quarter of 2008. The model does so even though inflation remains very dependent on the evolution of economic activity and of monetary ...
Report
Inflation dynamics in a small open-economy model under inflation targeting: some evidence from Chile
This paper estimates a small open-economy dynamic stochastic general equilibrium (DSGE) model, specified along the lines of Gal and Monacelli (2005) and Lubik and Schorfheide (2007), using Chilean data for the full inflation-targeting period of 1999 to 2007. We study the specification of the policy rule followed by the Central Bank of Chile, the dynamic response of inflation to domestic and external shocks, and the change in these dynamics under different policy parameters. We use the DSGE-VAR methodology from our earlier work (2007) to assess the robustness of the conclusion to the presence ...
Discussion Paper
Combining Models for Forecasting and Policy Analysis
Model uncertainty is pervasive. Economists, bloggers, policymakers all have different views of how the world works and what economic policies would make it better. These views are, like it or not, models. Some people spell them out in their entirety, equations and all. Others refuse to use the word altogether, possibly out of fear of being falsified. No model is “right,” of course, but some models are worse than others, and we can have an idea of which is which by comparing their predictions with what actually happened. If you are open-minded, you may actually want to combine models in ...
Report
Online Estimation of DSGE Models
This paper illustrates the usefulness of sequential Monte Carlo (SMC) methods in approximating DSGE model posterior distributions. We show how the tempering schedule can be chosen adaptively, explore the benefits of an SMC variant we call generalized tempering for ?online? estimation, and provide examples of multimodal posteriors that are well captured by SMC methods. We then use the online estimation of the DSGE model to compute pseudo-out-of-sample density forecasts of DSGE models with and without financial frictions and document the benefits of conditioning DSGE model forecasts on nowcasts ...
Working Paper
Improving GDP measurement: a forecast combination perspective
Two often-divergent U.S. GDP estimates are available, a widely-used expenditure-side version GDPE, and a much less widely-used income-side version GDI . The authors propose and explore a "forecast combination" approach to combining them. They then put the theory to work, producing a superior combined estimate of GDP growth for the U.S., GDPC. The authors compare GDPC to GDPE and GDPI , with particular attention to behavior over the business cycle. They discuss several variations and extensions.
Working Paper
Macroeconomic dynamics near the ZLB: a tale of two equilibria
This paper studies the dynamics of a New Keynesian dynamic stochastic general equilibrium (DSGE) model near the zero lower bound (ZLB) on nominal interest rates. In addition to the standard targeted-inflation equilibrium, we consider a deflation equilibrium as well as a Markov sunspot equilibrium that switches between a targeted-inflation and a deflation regime. We use the particle filter to estimate the state of the U.S. economy during and after the 2008-09 recession under the assumptions that the U.S. economy has been in either the targeted-inflation or the sunspot equilibrium. We consider ...
Working Paper
Shrinkage estimation of high-dimensional factor models with structural instabilities
In high-dimensional factor models, both the factor loadings and the number of factors may change over time. This paper proposes a shrinkage estimator that detects and disentangles these instabilities. The new method simultaneously and consistently estimates the number of pre- and post-break factors, which liberates researchers from sequential testing and achieves uniform control of the family-wise model selection errors over an increasing number of variables. The shrinkage estimator only requires the calculation of principal components and the solution of a convex optimization problem, which ...
Report
Methods versus substance: measuring the effects of technology shocks on hours
In this paper, we employ both calibration and modern (Bayesian) estimation methods to assess the role of neutral and investment-specific technology shocks in generating fluctuations in hours. Using a neoclassical stochastic growth model, we show how answers are shaped by the identification strategies and not by the statistical approaches. The crucial parameter is the labor supply elasticity. Both a calibration procedure that uses modern assessments of the Frisch elasticity and the estimation procedures result in technology shocks accounting for 2% to 9% of the variation in hours worked in the ...