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Estimating Dynamic Macroeconomic Models : How Informative Are the Data?
Central banks have long used dynamic stochastic general equilibrium (DSGE) models, which are typically estimated using Bayesian techniques, to inform key policy decisions. This paper offers an empirical strategy that quantifies the information content of the data relative to that of the prior distribution. Using an off-the-shelf DSGE model applied to quarterly Euro Area data from 1970:3 to 2009:4, we show how Monte Carlo simulations can reveal parameters for which the model's structure obscures identification. By integrating out components of the likelihood function and conducting a Bayesian ...