on identification of bayesian dsge models this article is concerned with local identification of individual parameters of dynamic stochastic general equilibrium dsge models estimated by bayesian methods identification is often judged by a comparison of the posterior distribution of a parameter with its prior however these can differ even when the parameter is not identified instead we propose two bayesian indicators of identification the first follows a suggestion by poirier of comparing the posterior density of the parameter of interest with the posterior expectation of its prior conditional on the remaining parameters the second examines the rate at which the posterior precision of the parameter gets updated with the sample size using data simulated at the parameter point of interest for an increasing sequence of sample sizes t for identified parameters the posterior precision increases at rate t for parameters that are either unidentified or are weakly identified the posterior precision may get updated but its rate of update wi

euro dollar real exchange rate dynamics in an estimated two country model an assessment abstract several theoretical contributions using two country models have combined alternative forms of pricing under nominal rigidities with different asset market structures to explain real exchange rate dynamics we estimate a two country model using data for the united states and the euro area and study the importance of such alternative assumptions in fitting the data a model with local currency pricing and incomplete markets does a good job in explaining real exchange rate volatility and fits the dynamics of domestic variables well the complete markets assumption delivers a similar fit only when the structure of shocks is rich enough

the effect of physician advice on alcohol consumption count regression with an endogenous treatment effect although there are encouraging trends alcohol abuse continues to be a significant public health problem econometric studies of alcohol demand have yielded a great deal of information for alcohol abuse prevention policy these studies suggest that higher alcohol taxes and stricter drunk driving policies can reduce heavy drinking and drunk driving in this paper we explore the role physician advice plays in the campaign to prevent alcohol related problems compared to alcohol taxation physician advice is a more precisely targeted intervention that does not impose extra costs on responsible drinkers compared to the resource costs of arresting processing and punishing drunk drivers physician advice may be a lower cost intervention to provide a basis for alcohol policy analysis we use an alcohol demand framework to test whether physician provided information about the adverse consequences of alcohol abuse shifts demand to more moderate levels there are three aspects of our alcohol demand model that complicate the estimation 1 the dependent variable is non negative it is a count variable number of drinks consumed 2 a non trivial number of sample observations have zero values for the dependent variable and 3 because the data we use is non experimental the treatment variable indicating receipt of advice from a physician may be endogenous we implement an estimation method that is specifically designed to deal with these three complicating factors our results show that advice has a substantial and significant impact on alcohol consumption by males with hypertension and that failing to account for the endogeneity of advice masks this result copyright 2001 john wiley sons ltd

comment on monetary policy under uncertainty in an estimated model with labor market frictions by luca sala ulf soderstrom and antonella trigari

forming priors for dsge models and how it affects the assessment of nominal rigidities abstract we discuss prior elicitation for the parameters of dynamic stochastic general equilibrium dsge models and provide a method for constructing prior distributions for a subset of these parameters from beliefs about steady state relationships and second moments of the endogenous variables the empirical application documents how the specification of the prior distribution affects our assessment of the relative importance of price and wage rigidities in a new keynesian dsge model

monetary fiscal policy interaction and fiscal inflation a tale of three countries abstract we study the impact of the interaction between fiscal and monetary policy on the low frequency relationship between the fiscal stance and inflation using cross country data from 1965 to 1999 in a first step we contrast the monetary fiscal narrative for germany the u s and italy with evidence obtained from simple regression models and a time varying var we find that the low frequency relationship between the fiscal stance and inflation is low during periods of an independent central bank and responsible fiscal policy and more pronounced in times of non responsible fiscal policy and accommodative monetary authorities in a second step we use an estimated dsge model to interpret the low frequency measure structurally and to illustrate the mechanisms through which fiscal actions affect inflation in the long run the findings from the dsge model suggest that switches in the monetary fiscal policy interaction and accompanying variations in the propagation of structural shocks can well account for changes in the low frequency relationship between the fiscal stance and inflation

stock market conditions and monetary policy in a dsge model for the u s abstract this paper investigates the interactions between stock market fluctuations and monetary policy within a dsge model for the u s economy first we design a framework in which fluctuations in households financial wealth are allowed but not necessarily required to exert an impact on current consumption this is due to the interaction in the financial markets of long time traders holding wealth accumulated over time with newcomers holding no wealth at all importantly we introduce nominal wage stickiness to induce pro cyclicality in real dividends additional nominal and real frictions are modeled to capture the pervasive macroeconomic persistence of the observables employed to estimate our model we fit our model to post wwii u s data and report three main results first the data strongly support a significant role of stock prices in affecting real activity and the business cycle second our estimates also identify a significant and counteractive response of the fed to stock price fluctuations third we derive from our model a microfounded measure of financial slack the stock price gap which we then contrast to alternative ones currently used in empirical studies to assess the properties of the latter to capture the dynamic and cyclical implications of our dsge model the behavior of our stock price gap is consistent with the episodes of stock market booms and busts occurred in the post wwii as reported by independent analyses and closely correlates with the current financial meltdown typically employed proxies of financial slack such as detrended log indexes or growth rates show limited capabilities of capturing the implications of our model consistent index of financial stress cyclical properties of the model as well as counterfactuals regarding shocks to our measure of financial slackness and monetary policy shocks are also proposed

uncertainty shocks asset supply and pricing over the business cycle this article estimates a business cycle model with endogenous financial asset supply and ambiguity averse investors firms shareholders choose not only production and investment but also capital structure and payout policy subject to financial frictions an increase in uncertainty about profits lowers stock prices and leads firms to substitute away from debt as well as reduce shareholder payout this mechanism parsimoniously accounts for the postwar comovement in investment stock prices leverage and payout at both business cycle and medium term cycle frequencies ambiguity aversion permits a markov switching var representation of the model while preserving the effect of uncertainty shocks on the time variation in the equity premium

comparing new keynesian models of the business cycle a bayesian approach abstract the baseline new keynesian model cannot replicate the observed persistence in inflation output and real wages for sensible parameter values as a result several extensions have been suggested to improve its fit to the data we use a bayesian approach to estimate and compare the baseline sticky price model of calvo s 1983 staggered prices in a utility maximizing framework journal of monetary economics 12 383 398 and three extensions our empirical results are as follows first we find that adding price indexation improves the fit of calvo s 1983 staggered prices in a utility maximizing framework journal of monetary economics 12 383 398 model second models with both staggered price and wage setting dominate models with only price rigidities third introducing wage indexation does not significantly improve the fit fourth all model estimates suggest a high degree of price stickiness fifth the estimates of labor supply elasticity are higher in models with both staggered price and wage contracts finally the estimated inflation parameters of the taylor rule are stable across models

housing market dynamics and macroprudential policy we perform an analysis to determine how well the introduction of a countercyclical loanto value ltv ratio can reduce household indebtedness and housing price fluctuations compared with a monetary policy rule augmented with house price inflation

estimating fiscal limits the case of greece summary this paper uses bayesian methods to estimate a real business cycle model that allows for interactions among fiscal policy instruments the stochastic fiscal limit and sovereign default using the particle filter to perform likelihood based inference we estimate the full nonlinear model with post emu data until 2010 q4 we find that i the probability of default on greek debt was in the range of 5 10 in 2010 q4 and ii the 2011 surge in the greek real interest rate is within model forecast bands the results suggest that a nonlinear rational expectations environment can account for the greek interest rate path copyright 2014 john wiley sons ltd

the macroeconomic effects of large scale asset purchase programmes the effects of asset purchase programs on macroeconomic variables are likely to be moderate we reach this conclusion after simulating the impact of the federal reserve s second large scale asset purchase program lsap ii in a dsge model enriched with a preferred habitat framework and estimated on u s data our simulations suggest that such a program increases gdp growth by less than half a percentage point although the effect on the level of gdp is very persistent the program s marginal contribution to infl ation is very small one key reason for our fi ndings is that we estimate a small degree of fi nancial market segmentation if we enrich the set of observables with a measure of long term debt the semi elasticity of the risk premium to the amount of debt in privatesector hands is substantially smaller than that reported in the recent empirical literature in this case our baseline estimates of the effects of lsap ii on the macroeconomy decrease by at least a factor of two throughout the analysis a commitment to an extended period at the zero lower bound for nominal interest rates increases the effects of asset purchase programs on gdp growth and infl ation

rare shocks great recessions summary we estimate a dsge dynamic stochastic general equilibrium model where rare large shocks can occur by replacing the commonly used gaussian assumption with a student s t distribution results from the smets and wouters american economic review 2007 97 586 606 model estimated on the usual set of macroeconomic time series over the 1964 2011 period indicate that i the student s t specification is strongly favored by the data even when we allow for low frequency variation in the volatility of the shocks and ii the estimated degrees of freedom are quite low for several shocks that drive us business cycles implying an important role for rare large shocks this result holds even if we exclude the great recession period from the sample we also show that inference about low frequency changes in volatility and in particular inference about the magnitude of great moderation is different once we allow for fat tails copyright 2014 john wiley sons ltd

estimating new keynesian phillips curves a full information maximum likelihood approach abstract the new keynesian phillips curve has recently become an important ingredient in monetary policy models however using limited information methods the empirical support for the new keynesian phillips curve appear to be mixed this paper argues by means of monte carlo simulations with a simple new keynesian sticky price model that single equations methods e g gmm are likely to produce imprecise and biased estimates then it is argued that estimating the model with full information maximum likelihood fiml is a useful way of obtaining better estimates finally a version of the model used in the monte carlo simulations is estimated on u s data with fiml and although the pure forward looking new keynesian phillips curve is rejected a version with both forward and backward looking components provides a reasonable approximation of u s inflation dynamics

bayesian prior elicitation in dsge models macro vs micropriors abstract bayesian approaches to the estimation of dsge models are becoming increasingly popular prior knowledge is normally formalized either directly on deep parameters values microprior or indirectly on macroeconomic indicators e g moments of observable variables macroprior we introduce a non parametric macroprior which is elicited from impulse response functions and assess its performance in shaping posterior estimates we find that using a macroprior can lead to substantially different posterior estimates we probe into the details of our result showing that model misspecification is likely to be responsible of that in addition we assess to what extent the use of macropriors is impaired by the need of calibrating some hyperparameters

clearing up the fiscal multiplier morass bayesian prior predictive analysis of five nested dsge models suggests that model specifications and prior distributions tightly circumscribe the range of possible government spending multipliers multipliers are decomposed into wealth and substitution effects yielding uniform comparisons across models by constraining the multiplier to tight ranges model and prior selections bias results revealing less about fiscal effects in data than about the lenses through which researchers choose to interpret data when monetary policy actively targets inflation output multipliers can exceed one but investment multipliers are likely to be negative passive monetary policy produces consistently strong multipliers for output consumption and investment

business cycle measurement with some theory a method to evaluate cyclical models not requiring knowledge of the dgp and the exact specification of the aggregate decision rules is proposed we derive robust restrictions in a class of models use some to identify structural shocks in the data and others to evaluate the class or contrast sub models the approach has good properties even in small samples and when the class of models is misspecified the method is used to sort out the relevance of a certain friction the presence of rule of thumb consumers in a standard class of models

welfare effects of criminal politicians a discontinuity based approach abstract this paper uses unique data on the criminal records of indian bureaucrats to examine the relationship between politicians criminality and consumption crime and corruption the identification relies on a regression discontinuity design by which individuals living in districts where a criminal politician was barely elected are compared with individuals living in districts where a criminal politician barely lost the results show that criminal politicians decrease consumption by vulnerable sections of society the monthly per capita expenditure of scheduled castes scheduled tribes or other backward classes decreases by 19 percent this paper suggests that the effect of criminal politicians on criminality and corruption may explain this result

euro area inflation persistence in an estimated nonlinear dsge model abstract we estimate the approximate non linear solution of a small dsge model on euro area data using the conditional particle filter to compute the model likelihood our results are consistent with previous findings based on simulated data suggesting that this approach delivers sharper inference compared to the estimation of the linearised model we also show that the non linear model can account for richer economic dynamics the impulse responses to structural shocks vary depending on initial conditions selected within our estimation sample

calvo vs rotemberg in a trend inflation world an empirical investigation this paper estimates and compares new keynesian dsge monetary models of the business cycle derived under two dierent pricing schemes calvo 1983 and rotemberg 1982 under a positive trend in ation rate our empirical ndings i support trend in ation as an empirically relevant feature of the u s great moderation ii provide evidence in favor of the statistical superiority of the calvo setting iii support the absence of price indexation under the calvo mechanism only the superiority of the calvo model against rotemberg is due to the restrictions imposed by such a pricing scheme on the aggregate demand equation the determinacy regions implied by the two estimated models indicate relevant dierences in the implementable simple policy rules

do expected future marginal costs drive inflation dynamics abstract this article discusses a more general interpretation of the two step minimum distance estimation procedure proposed in sbordone 2002 the estimator is again applied to a version of the new keynesian phillips curve where inflation dynamics are driven by the expected evolution of marginal costs the article clarifies econometric issues addresses concerns about uncertainty and model misspecification raised in recent studies and assesses the robustness of previous results while confirming the importance of forward looking terms in accounting for inflation dynamics it suggests how the methodology can be applied to extend the analysis of inflation to a multivariate setting

nested models and model uncertainty uncertainty about the appropriate choice among nested models is a concern for optimal policy when policy prescriptions from those models dier the standard procedure is to specify a prior over the parameter space ignoring the special status of sub models e g those resulting from zero restrictions following sims 2008 we treat nested sub models as probability models and we formalize a procedure that ensures that sub models are not discarded too easily and do matter for optimal policy for the united states we nd that optimal policy based on our procedure leads to substantial welfare gains compared to the standard procedure

fiscal news and macroeconomic volatility abstract this paper analyzes the contribution of anticipated capital and labor tax shocks to business cycle volatility in an estimated new keynesian business cycle model while fiscal policy accounts for about 15 of output variance at business cycle frequencies this mostly derives from anticipated government spending shocks tax shocks both anticipated and unanticipated contribute little to the fluctuations of real variables however anticipated capital tax shocks do explain a sizable part of inflation fluctuations accounting for up to 12 of its variance in line with earlier studies news shocks in total account for about 50 of output variance further decomposing this news effect we find permanent total factor productivity news shocks to be most important when looking at the federal level instead of total government the importance of anticipated tax and spending shocks significantly increases suggesting that fiscal policy at the subnational level typically counteracts the effects of federal fiscal policy shocks

structural fiscal balances of the uk a state space dsge approach abstractthis article proposes a new framework to estimate and analyse structural fiscal balances of the uk by combining the state space modelling with the bayesian dsge modelling in this way trends and cycles of aggregate variables can be extracted from data consistently with the macroeconomic theory a setting of an integrated random walk for the underlying stochastic trends fits the data best an expansion in government spending can increase nominal fiscal revenue to a certain degree but the effect is not persistent due to two kinds of crowd out effects it crowds out domestic investment and it pushes up the price of domestic goods and simultaneously crowds out the foreign demand the shocks to the nominal interest rate foreign output and the government spending are the three major contributors to the variation of the fiscal revenue cycle

consumer misperceptions uncertain fundamentals and the business cycle abstract this paper estimates the importance of shocks to consumer misperceptions noise shocks for u s business cycle fluctuations i embed imperfect information as in lorenzoni 2009 into a smets and wouters 2007 type dsge model agents only observe aggregate productivity and a signal about the permanent component contaminated with noise based on this information agents form beliefs about the temporary and the permanent component of productivity shocks to the signal noise shocks trigger aggregate fluctuations unrelated to changes in productivity bayesian estimation shows that noise shocks explain up to 14 percent of output and up to 25 percent of consumption fluctuations nominal rigidities and the specification of the monetary policy rule are crucial for the importance of noise shocks these features help to resolve conflicting results in the previous literature

five facts about prices a reevaluation of menu cost models are price decreases 3 the frequency of price increases covaries strongly with inflation whereas the frequency of price decreases and the size of price increases and price decreases do not 4 the frequency of price change is highly seasonal it is highest in the first quarter and then declines 5 we find no evidence of upwardsloping hazard functions of price changes for individual products we show that the first second and third facts are consistent with a benchmark menu cost model whereas the fourth and fifth facts are not

investment shocks and business cycles abstract the origins of business cycles are still controversial among macroeconomists this paper contributes to this debate by studying the driving forces of fluctuations in an estimated new neoclassical synthesis model of the u s economy in this model most of the variability of output and hours at business cycle frequencies is due to shocks to the marginal efficiency of investment imperfect competition and to a lesser extent technological frictions are the key to their transmission although labor supply shocks explain a large fraction of the fluctuations in hours at very low frequencies they are irrelevant over the business cycle this finding is important because the microfoundations of these disturbances are widely regarded as unappealing

monetary policy analysis with potentially misspecified models abstract the paper proposes a novel method for conducting policy analysis with potentially misspecified dynamic stochastic general equilibrium dsge models and applies it to a new keynesian dsge model along the lines of christiano eichenbaum and evans jpe 2005 and smets and wouters jeea 2003 we first quantify the degree of model misspecification and then illustrate its implications for the performance of different interest rate feedback rules we find that many of the prescriptions derived from the dsge model are robust to model misspecification jel classification c32 key words bayesian analysis dsge models model misspecification 1 introduction the quantitative evaluation of monetary policy rules plays an important role in the design of stabilization policies much of the recent debate about optimal monetary policy rules has been carried out with new keynesian dynamic stochastic general equilibrium dsge models see woodford 2003 dsge models have the advantage that one can explicitly assess the effect of policy regime changes on expectation formation and decision rules of private agents yet until recently these models were scarcely used by central banks because they were perceived as being inferior to less structural model in terms of fit recent work by christiano eichenbaum and evans 2005 and smets and wouters 2003 has changed this perception these papers show that the fit of large scale new keynesian dsge models is comparable to that of more heavily parameterized models as a consequence a number of central banks have begun to show interest in these models as tools for quantitative policy analysis despite the success in improving the empirical performance of dsge models misspecification remains a concern as shown in del negro schorfheide smets and wouters 2004 accounting for misspecification and model uncertainty in general is an important aspect of the assessment of monetary policies after all it has long been recognized that model and parameter uncertainty affects optimal policies e g brainard 1967 chow 1975 and craine 1979 1 this paper proposes a new method for taking model misspecification into account when assessing the performance of alternative interest rate feedback rules we apply this approach to evaluate different policies in the context of a new keynesian dsge model including the estimated volcker greenspan rule a natural approach in the presence of model uncertainty is to evaluate policy rules within all the model specifications that are under consideration in choosing the best performing rule one can either follow a bayesian route assigning probabilities to models and minimizing the overall posterior expected loss alternatively one can follow a minimax strategy by adopting a policy that minimizes the worst case loss across models the literature contains numerous applications of these ideas e g mccallum 1988 levin wieland and williams 1999 2003 rudebusch 2001 2003 onatski and stock 2002 onatski and williams 2003 brock durlauf and west 2004 cogley and sargent 2005 and hansen and sargent 2005 all these papers differ with regard to the type of models included in the model set and the formulation of the decision problem that leads to the choice of a preferred policy our analysis differs from previous work with respect to the method that is used to construct a model set and assign probabilities to these models so that a bayesian calculation of posterior expected performance is possible we start from a dsge model in which monetary policy is modelled through an interest rate feedback rule the dsge model imposes cross coefficient restrictions on a vector autoregressive representation of the data while we are assuming that the data obey a vector autoregressive law of motion we allow for potential deviations from the cross coefficient restrictions at the same time we maintain the assumption that monetary policy follows the same interest rate rule as in the dsge model

revealing the preferences of the us federal reserve we use bayesian methods to estimate changes in us post war monetary policy in the smets and wouters model we perform the estimations by allowing for a break in monetary policy at the time of volcker s appointment as chairman this enables us to capture changes in the monetary policy regime introduced by volcker during the volcker greenspan period we find support for the assumption that monetary policy in the volcker greenspan period performed optimally under commitment our estimation strategy allows us to estimate the preferences of the us federal reserve in the volcker greenspan period where the main objective of policy appears to be inflation followed by interest rate stabilization output growth and interest rate smoothing we find that the great moderation of output growth is explained by a combination of two factors the decrease in the volatility of the structural shocks and the improved monetary policy conduct inflation stabilization however is mainly due to the change in monetary policy that took place at the beginning of volcker s mandate copyright 2010 john wiley sons ltd

on the stability of calvo style price setting behavior an increasing literature has been concerned that the dynamics of the economy keeps switching and that in particular it is important to allow time variation in the degree of calvo stickiness we investigate this with a markov switching dynamic stochastic general equilibrium model and show that there is little gain when allowing for such time variation as a result we recommend to use a constant calvo stickiness parameter even when allowing for regime shifts elsewhere

business cycle implications of internal consumption habit for new keynesian models we study the implications of internal consumption habit for new keynesian dynamic stochastic general equilibrium nkdsge models bayesian monte carlo methods are employed to evaluate nkdsge model fit simulation experiments show that internal consumption habit often improves the ability of nkdsge models to match the spectra of output and consumption growth nonetheless thefit of nkdsge models with internal consumption habit is susceptible to the sources of nominal rigidity to spectra identified by permanent productivity shocks to the choice of monetary policy rule and to the frequencies used for evaluation these vulnerabilities indicate that the specification of nkdsge models is fragile

figuring out the fed beliefs about policymakers and gains from transparency in this paper i use a markov chain monte carlo algorithm to estimate a model of private sector behavior that does not feature private sector knowledge of the monetary policymaking process and instead leaves firms and households uncertain about how monetary policy is set the private sector entertains two competing views of monetary policymaking which i estimate firms and households use bayes law on a rolling data sample to distinguish between those two models i use this setup to study the evolution of beliefs about the federal reserve and the possible gains from transparency

the impact of oil price shocks in the canadian economy a structural investigation on an oil exporting economy abstract oil price shocks and monetary policy response by oil producing economies have been the subject of important theoretical investigation in the modern literature this topic seems to be well grounded since fluctuations in the us dollar which is affected by us monetary policy plays an important role in exacerbating run ups and precipitous falls in world oil prices we investigate the economic consequences of oil price shocks using an open economy dsge model that incorporates demand for and supply of oil while allowing for interaction between domestic and foreign monetary policy using canadian and u s data we quantify the relative importance of oil price shocks and monetary policy response on macroeconomic variables we show that domestic monetary policy is a key channel that accounts for over 40 of discounted variation in domestic output across a 4 year horizon after an oil shock in contrast us monetary policy is of lesser importance in propagating oil price shocks on an oil exporting economy through the international channel

learning in an estimated medium scale dsge model in this paper we evaluate the empirical relevance of learning by private agents in an estimated medium scale dsge model we replace the standard rational expectation assumption in the smets and wouters 2007 model by a constant gain learning mechanism if agents know the correct structure of the model and only learn about the parameters both expectation mechanisms resultin asimilarfit and onlythetransition dynamicsthatare generated byspecific initial beliefs can distinguish the two approaches if in addition agents use only a reduced information set in forming the perceived law of motion the implied model dynamics change and for some initial beliefs the marginal likelihood of the model is further improved however the estimated gain parameter is estimated to be small which suggests a crucial role for the initial beliefs to explain the improved fit the learning models with the highest posterior probabilities add some additional persistence to the dsge model that reduce the gap between the irfs of the dsge model and the more data driven dsge var model however the additional dynamics that are introduced by the learning process do not systematically alter the estimated structural parameters related to the nominal and real frictions in the dsge model jel codes c11 d84 e30 e52

forecasting with medium and large bayesian vars this paper is motivated by the recent interest in the use of bayesian vars for forecasting even in cases where the number of dependent variables is large in such cases factor methods have been traditionally used but recent work using a particular prior suggests that bayesian var methods can forecast better in this paper we consider a range of alternative priors which have been used with small vars discuss the issues which arise when they are used with medium and large vars and examine their forecast performance using a us macroeconomic dataset containing 168 variables we find that bayesian vars do tend to forecast better than factor methods and provide an extensive comparison of the strengths and weaknesses of various approaches typically we find that the simple minnesota prior forecasts well in medium and large vars which makes this prior attractive relative to computationally more demanding alternatives our empirical results show the importance of using forecast metrics based on the entire predictive density instead of relying solely on those based on point forecasts

monetary policy regime shifts and inflation persistence abstract using bayesian methods we estimate a markov switching new keynesian msnk model that allows shifts in the monetary policy reaction coefficients and shock volatilities with u s data we find that a more aggressive monetary policy regime was in place after the volcker disinflation and before 1970 than during the great inflation of the 1970s our estimates also indicate that a low volatility regime has been in place during most of the sample period after 1984 we connect the timing of the different regimes to a measure of inflation persistence

signalling effects of monetary policy we develop a dynamic general equilibrium model in which the policy rate signals the central bank s view about macroeconomic developments to price setters the model is estimated with likelihood methods on a u s data set that includes the survey of professional forecasters as a measure of price setters inflation expectations this model improves upon existing perfect information models in explaining why in the data inflation expectations respond with delays to monetary impulses and remain disanchored for years in the 1970s u s monetary policy is found to signal persistent inflationary shocks explaining why inflation and inflation expectations were so persistently heightened the signalling effects of monetary policy also explain why inflation expectations adjusted more sluggishly than inflation after the robust monetary tightening of the 1980s

a method for agent based models validation abstract this paper proposes a new method to empirically validate simulation models that generate artificial time series data comparable with real world data the approach is based on comparing structures of vector autoregression models which are estimated from both artificial and real world data by means of causal search algorithms this relatively simple procedure is able to tackle both the problem of confronting theoretical simulation models with the data and the problem of comparing different models in terms of their empirical reliability moreover the paper provides an application of the validation procedure to the agent based macroeconomic model proposed by dosi et al 2015

identification issues in limited information bayesian analysis of structural macroeconomic models the likelihood of the parameters in structural macroeconomic models typically has non identification regions over which it is constant when sufficiently diffuse priors are used the posterior piles up in such non identification regions use of informative priors can lead to the opposite so both can generate spurious inference we propose priors posteriors on the structural parameters that are implied by priors posteriors on the parameters of an embedding reduced form model an example of such a prior is the jeffreys prior we use it to conduct bayesian limited information inference on the new keynesian phillips curve with a var reduced form for us data

introducing financial frictions and unemployment into a small open economy model the current nancial crisis has made it abundantly clear that business cycle modeling no longer can abstract from nancial factors it is also becoming increasingly clear that the stylized modeling of labor markets without explicit unemployment that is the current standard approach has its limitations some questions which the dominating extant business cycle models are mute on but that we would like to answer are how important are nancial and labor market frictions for the business cycle dynamics of a

using survey data of inflation expectations in the estimation of learning and rational expectations models do survey data on inflation expectations contain useful information for estimating macroeconomic models i address this question by using survey data in the new keynesian model by smets and wouters 2007 to estimate and compare its performance when solved under the assumptions of rational expectations and learning this information serves as an additional moment restriction and helps to determine the forecasting model for inflation that agents use under learning my results reveal that the predictive power of this model is improved when using both survey data and an admissible learning rule for the formation of inflation expectations

estimating the evolution of money s role in the u s monetary business cycle we assess money s role in the post wwii u s business cycle by employing both fixed coefficient and rolling window bayesian estimations of a structural model of the business cycle with money our empirical evidence favors a specification with drifting parameters for money consumption nonseparability and the federal reserve s reaction to nominal money growth the role of money is estimated to have been important during the 1970s and declined afterward the omission of money produces severely distorted impulse response functions relative to the model with money money is found to be important in replicating the u s output volatility during the great inflation

labor market heterogeneity aggregation and policy in variance of dsge model parameters data from a heterogeneous agents economy with incomplete asset markets and indivisible labor supply are simulated under various fiscal policy regimes and an approximating representative agent model is estimated preference and technology parameter estimates of the representative agent model are not invariant to policy changes and the bias in the representative agent model s policy predictions is large compared to predictive intervals that reflect parameter uncertainty since it is not always feasible to account for heterogeneity explicitly it is important to recognize the possibility that the parameters of a highly aggregated model may not be invariant with respect to policy changes

can public spending boost private consumption this paper analyses the effects on private consumption from an increase in productive and unproductive public spending a new keynesian model incorporating price and wage rigidities monetary policy and various fiscal rules is developed and estimated using bayesian techniques to capture the key cyclical characteristics of the us economy we find that price and wage rigidities along with a positive shock to the part of public spending that is productive are suficient to boost private consumption moreover we show that this initial positive reaction of private consumption is adequate to create a positive present value consumption multiplier for more than five years finally we show that our main results remain robust to changes in the monetary rule and the various methods of deficit financing

long run implications of investment specific technological change an attempt is made to disentangle its effects from the more traditional hicksneutral form of technological progress the balanced growth path for the model is characterized and calibrated to u s national income and product account nipa data the quantitative analysis suggests that investment specific technological change accounts for the major part of growth jel e13 030 041 047

trend inflation indexation and inflation persistence in the new keynesian phillips curve purely forward looking versions of the new keynesian phillips curve nkpc generate too little inflation persistence some authors add ad hoc backward looking terms to address this shortcoming we hypothesize that inflation per sistence results mainly from variation in the long run trend component of inflation which we attribute to shifts in monetary policy we derive a version of the nkpc that incorporates a time varying inflation trend and examine whether it explains the dynamics of inflation when drift in trend inflation is taken into account a purely forward looking version of the model fits the data well and there is no need for backward looking components jel e12 e31 e52 in this paper we consider the extent to which guillermo calvo s 1983 model of nominal price rigidities can explain inflation dynamics without relying on arbitrary backward looking terms in its baseline formulation the calvo model leads to a purely forward looking new keynesian

fitting observed inflation expectations abstract the paper provides evidence on the extent to which inflation expectations generated by a standard christiano et al 2005 smets and wouters 2003 type dsge model are in line with what observed in the data we consider three variants of this model that differ in terms of the behavior of and the public s information on the central banks inflation target allegedly a key determinant of inflation expectations we find that i time variation in the inflation target is needed to capture the evolution of expectations during the post volcker period ii the variant where agents have imperfect information is strongly rejected by the data iii inflation expectations appear to contain information that is not present in the other series used in estimation and iv none of the models fully capture the dynamics of this variable

priors from general equilibrium models for vars abstract this paper uses a simple new keynesian dynamic stochastic general equilibrium model as a prior for a vector autoregression shows that the resulting model is competitive with standard benchmarks in terms of forecasting and can be used for policy analysis jel classification c11 c32 c53 key words bayesian analysis dsge models forecasting vector autoregressions 1 introduction dynamic stochastic general equilibrium dsge models are popular nowadays in macroeconomics they are taught in virtually every economics ph d program and represent a predominant share of publications in the field yet when it comes to policy making these models are scarcely used at least from a quantitative point of view the main quantitative workhorse for policy making at the federal reserve system is frb us a macro econometric model built in the cowles foundation tradition a style of macroeconomics that is no longer taught in many ph d programs 1 in their decision process fed policy makers rely heavily on forecasting they want to know the expected path of inflation in the next few quarters and by how much a 50 basis point increase in the federal funds rate would affect that path frb us offers answers to these questions answers that many macroeconomists would regard with suspicion given both the lucas 1976 critique and the fact that in general the restrictions imposed by cowles foundation models are at odds with dynamic general equilibrium macroeconomics sims 1980 general equilibrium models on the other hand have a hard time providing alternative answers the fact that these models are perceived to do badly in terms of forecasting as they are scarcely parameterized is perhaps one of the reasons why they are not at the forefront of policy making while progress is being made in the development of dsge models that deliver acceptable forecasts e g smets and wouters 2003 this paper proposes an approach that combines a stylized general equilibrium model with a vector autoregression var to obtain a specification that both forecasts well and is usable for policy analysis specifically the approach involves using prior information coming from a dsge model in the estimation of a vector autoregression loosely speaking this prior can be thought of as the result of the following exercise i simulate time series data from the dsge model ii fit a var to these data in practice we replace the sample moments of the simulated data by population moments computed from the dsge model solution since the dsge model depends on unknown structural parameters we use a hierarchical prior in our analysis by placing a distribution on the dsge model parameters a tightness parameter controls the weight of the dsge model prior relative to the weight of the actual sample markov chain monte carlo methods are used to generate draws from the joint posterior distribution of the var and dsge model parameters the paper shows that the approach makes even a fairly stylized new keynesian dsge model competitive with standard benchmarks in terms of forecasting real output growth inflation and the nominal interest rate the three variables that are of most interest to policy makers 2 up to this point our procedure borrows from the work of dejong ingram and whiteman 1993 and ingram and whiteman 1994 who are the first to use priors from dsge models for vars ingram and whiteman showed that prior information from the bare bones stochastic growth model of king plosser and rebelo 1988 is helpful in forecasting real economic activity such as output consumption investment and hours worked in addition to documenting the forecasting performance of a trivariate var with a prior derived from a monetary dsge model this paper makes two contributions that significantly extend the earlier work first we show formally how posterior inference for the var parameters can be translated into posterior inference for dsge model parameters

local identification in dsge models abstract the issue of identification arises whenever structural models are estimated lack of identification means that the empirical implications of some model parameters are either undetectable or indistinguishable from the implications of other parameters therefore identifiability must be verified prior to estimation this paper provides a simple method for conducting local identification analysis in linearized dsge models estimated in both full and limited information settings in addition to establishing which parameters are locally identified and which are not researchers can determine whether the identification failures are due to data limitations such as lack of observations for some variables or whether they are intrinsic to the structure of the model the methodology is illustrated using a medium scale dsge model

on the fit of new keynesian models this article provides new tools for the evaluation of dynamic stochastic general equilibrium dsge models and applies them to a large scale new keynesian model we approximate the dsge model by a vector autoregression and then systematically relax the implied cross equation restrictions and document how the model fit changes we also compare the dsge model s impulse responses to structural shocks with those obtained after relaxing its restrictions we find that the degree of misspecification in this large scale dsge model is no longer so large as to prevent its use in day to day policy analysis yet is not small enough to be ignored

posterior predictive evidence on us inflation using extended new keynesian phillips curve models with non filtered data changing time series properties of us inflation and economic activity measured as marginal costs are modeled within a set of extended new keynesian phillips curve nkpc models it is shown that mechanical removal or modeling of simple low frequency movements in the data may yield poor predictive results which depend on the model specification used basic nkpc models are extended to include structural time series models that describe typical time varying patterns in levels and volatilities forward and backward looking expectation components for inflation are incorporated and their relative importance is evaluated survey data on expected inflation are introduced to strengthen the information in the likelihood use is made of simulation based bayesian techniques for the empirical analysis no credible evidence is found on endogeneity and long run stability between inflation and marginal costs backward looking inflation appears stronger than forward looking inflation levels and volatilities of inflation are estimated more precisely using rich nkpc models the extended nkpc structures compare favorably with existing basic bayesian vector autoregressive and stochastic volatility models in terms of fit and prediction tails of the complete predictive distributions indicate an increase in the probability of deflation in recent years

habit formation in consumption a meta analysis abstract we examine 597 estimates of habit formation reported in 81 published studies the mean reported strength of habit formation equals 0 4 but the estimates vary widely both within and across studies we use bayesian and frequentist model averaging to assign a pattern to this variance while taking into account model uncertainty studies employing macro data report consistently larger estimates than micro studies 0 6 vs 0 1 on average the difference remains 0 5 when we control for 30 factors that reflect the context in which researchers obtain their estimates such as data frequency geographical coverage variable definition estimation approach and publication characteristics we also find that evidence for habits strengthens when researchers use lower data frequencies employ log linear approximation of the euler equation and utilize open economy dsge models moreover estimates of habits differ systematically across countries

input and output inventories in general equilibrium we build and estimate a two sector goods and services dynamic stochastic general equilibrium model with two types of inventories materials input inventories facilitate the production of nished goods while nished goods output inventories yield utility services the model is estimated using bayesian methods the estimated model replicates the volatility and cyclicality of inventory investment and inventory to target ratios although inventories are an important element of the model s propagation mechanism shocks to inventory e ciency or management are not an important source of business cycles when the model is estimated over two subperiods pre and post 1984 changes in the volatility of inventory shocks or in structural parameters associated with inventories such as the input inventory to output ratio play a small role in reducing the volatility of output

the effects of the near zero interest rate policy in a regime switching dynamic stochastic general equilibrium model abstract standard dynamic stochastic general equilibrium dsge models cannot explain the near zero interest rate policy near zirp by the federal reserve i study two methods of modeling the near zirp in dsge models the perfect foresight model and the markov regime switching model developed in this paper the near zirp has a significant expansionary effect and the regime switching model generates a more realistic predicted path of macro variables than the perfect foresight model furthermore the government purchases multiplier in the near zirp regime is smaller than what the literature finds at the zero lower bound zlb and the contractionary effects of higher productivity found by the recent literature at the zlb are not present in the regime switching model

information and advertising the case of fat consumption in the united states the role of information in markets has become a mainstay of the economics literature theoretical work has focused on the market effects of asymmetric information and costly search incentives for voluntary disclosure contracting and other market and policy solutions to information issues see michael katz 1989 and joseph stiglitz 1989 for recent reviews and on how consumers ability to use information could affect market outcomes as in the recent work on information cascades e g sushil bikhchandani et al 1992 the empirical literature testing informational theories is more limited in large part because the key variable of interest information is so difficult to measure most of the literature relies on indirect tests usually based on regulatory differences as in the study of state restrictions on advertising for eyeglasses lee benham 1972 or on new information or public education campaigns typified by the studies of smoking see w kip viscusi 1992 for a recent summary other studies examine cross sectional differences in behavior in an effort to assess whether human capital or other individual or household differences are important in explaining responses to evolving information this paper follows these traditions specifically this study examines changes in fat and saturated fat consumption in the united states as information spread connecting these lipids to heart disease and cancer risks 1 the study examines changes in consumption during two regulatory regimes the years 1977 1985 when government and general information sources continued their efforts to educate the public about the links between fats and disease risks and when producers were free to label these characteristics on food packages and in advertising and the years 1985 1990 when the regulatory ban was lifted that prohibited producers from explaining the reasons why consumers should be interested in the content of foods this controversial regulatory change allowed the use of so called health claims in labeling and advertising subject to the normal deception rules for all advertising and labeling claims 2 comparison of these two periods allows us to provide evidence on whether and how consumers reacted to the general flow of information prior to 1985 and whether advertising appears to have added information to the market or as many critics believe provided deceptive or sufficiently incomplete information to undermine public education efforts

strategic interaction among heterogeneous price setters in an estimated dsge model abstract we consider a dynamic stochastic general equilibrium model dsge in which firms follow one of four price setting regimes sticky prices sticky information rule of thumb or full information flexible prices the parameters of the model including the fraction of each type of firm are estimated by matching the moments of the observed variables of the model to those found in the data we find that sticky price firms and sticky information firms jointly account for over 80 of firms in the model we compare the performance of our hybrid model to pure sticky price and sticky information models along various dimensions including monetary policy implications

the demand for alcohol the differential response to price although several studies indicate that drinking is responsive to price little work has focused on whether prices have a differential effect on light moderate or heavy drinking this study examines the price responsiveness of the demand for alcohol whether heavy drinkers are less sensitive to price than light or moderate drinkers the study uses data on alcohol consumption on the 1983 national health interview survey the results indicate that both light and heavy drinkers are much less price elastic than moderate drinkers further we cannot reject the hypothesis that the very heaviest drinkers have perfectly price inelastic demands

methods versus substance measuring the effects of technology shocks abstract calibration and modern bayesian estimation methods for a neoclassical stochastic growth model are applied to make the case that the identification of key parameters rather than quantitative methodologies per se is responsible for empirical findings for concreteness the model is used to measure the contributions of technology shocks to the business cycle fluctuations of hours worked and output along the way new insights are provided in the parameter identification associated with likelihood based estimation the sensitivity of likelihood based estimation to the choice of structural shocks is assessed and bayesian model averaging is used to aggregate findings obtained from different dsge model specifications