The implications of inflation in an estimated New-Keynesian model

This paper studies the steady state and dynamic consequences of inflation in an estimated dynamic stochastic general equilibrium model of the U.S. economy. It is found that 10 percentage points of inflation entails a steady state welfare cost as high as 13 percent of annual consumption. This large cost is mainly driven by staggered price contracts and price indexation. The transition from high to low inflation inflicts a welfare loss equivalent to 0.53 percent. The role of nominal/real frictions as well as that of parameter uncertainty is also addressed.Inflation (Finance) ; Econometric models ; Keynesian economics

Do uncertainty and technology drive exchange rates?

This paper investigates the extent to which technology and uncertainty contribute to fluctuations in real exchange rates. Using a structural VAR and bilateral exchange rates, the author finds that neutral technology shocks are important contributors to the dynamics of real exchange rates. Investment-specific and uncertainty shocks have a more restricted effect on international prices. All three disturbances cause short-run deviations from uncovered interest rate parity.Foreign exchange ; Uncertainty ; Technological innovations

Common and idiosyncratic disturbances in developed small open economies

Using an estimated dynamic stochastic general equilibrium model, I show that shocks to a common international stochastic trend explain on average about 10% of the variability of output in several small developed economies. These shocks explain roughly twice as much of the volatility of consumption growth as the volatility of output growth. Country-speci c disturbances account for the bulk of the volatility in the data. Substantial heterogeneity in the estimated parameters and stochastic processes translates into a rich array of impulse responses across countries.

Bayesian Estimation of DSGE Models

We survey Bayesian methods for estimating dynamic stochastic general equilibrium (DSGE) models in this article. We focus on New Keynesian (NK)DSGE models because of the interest shown in this class of models by economists in academic and policy-making institutions. This interest stems from the ability of this class of DSGE model to transmit real, nominal, and fiscal and monetary policy shocks into endogenous fluctuations at business cycle frequencies. Intuition about these propagation mechanisms is developed by reviewing the structure of a canonical NKDSGE model. Estimation and evaluation of the NKDSGE model rests on being able to detrend its optimality and equilibrium conditions, to construct a linear approximation of the model, to solve for its linear approximate decision rules, and to map from this solution into a state space model to generate Kalman filter projections. The likelihood of the linear approximate NKDSGE model is based on these projections. The projections and likelihood are useful inputs into the Metropolis-Hastings Markov chain Monte Carlo simulator that we employ to produce Bayesian estimates of the NKDSGE model. We discuss an algorithm that implements this simulator. This algorithm involves choosing priors of the NKDSGE model parameters and fixing initial conditions to start the simulator. The output of the simulator is posterior estimates of two NKDSGE models, which are summarized and compared to results in the existing literature. Given the posterior distributions, the NKDSGE models are evaluated with tools that determine which is most favored by the data. We also give a short history of DSGE model estimation as well as pointing to issues that are at the frontier of this research.

What you match does matter: the effects of data on DSGE estimation

This paper explores the effects of using alternative combinations of observables for the estimation of Dynamic Stochastic General Equilibrium (DSGE) models. I find that the estimation of structural parameters describing the Taylor rule and sticky contracts in prices and wages is particularly sensitive to the set of observables. In terms of the model's predictions, the exclusion of some observables may lead to estimated parameters with unexpected outcomes, such as recessions following a positive technology shock. More importantly, two ways to assess different sets of observables are proposed. These measures favor a dataset consisting of seven observables. Copyright © 2009 John Wiley & Sons, Ltd.

Refinements on macroeconomic modeling: The role of non-separability and heterogeneous labor supply

This paper proposes a dynamic stochastic general equilibrium model characterized by heterogenous labor schedules and non-separability between consumption and labor in the utility function. The model successfully describes output, consumption, investment, and interest rates after a monetary expansion. The proposed formulation improves on standard models by using preferences favored by the data and by requiring investment adjustment costs and habit formation parameters more in line with the micro-based evidence.Non-separability Sticky wages/prices Impulse response

Money demand heterogeneity and the great moderation

A forward-looking model of the demand for money based on heterogeneous and sluggish-portfolio adjustment can simultaneously account for the low short-run and high long-run semi-elasticities reported in the literature. The parameter estimates from the model for the short-run and long-run interest semi-elasticities are 1.04 and 13.16, respectively. A simulated version of the model suggests that the Great Moderation can be partially attributed to financial innovations in the late 1970s. When moving toward a more flexible portfolio, the model can account for almost one-third of the observed decline in the volatilities of output, consumption, and investment.Financial innovation Great moderation GMM Money demand Sluggish-portfolio adjustment Monetary and technology shocks