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Are DSGE Approximating Models Invariant to Shifts in Policy?

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  • Cogley Timothy

    (New York University)

  • Yagihashi Takeshi

    (College of Staten Island)

Abstract

Bayesian and maximum-likelihood estimates of structural parameters in DSGE approximating models are invariant to shifts in policy only when the model is correctly specified. Since DSGE models are approximations, strict invariance is unattainable. Despite that, DSGE models might be useful for policy analysis provided that structural parameters are approximately invariant. We discuss this issue in the context of an example involving a pair of new Keynesian DSGE models in which the central bank's policy model includes a misspecified Phillips curve. In our example, the approximating model is a useful guide for policy despite the failure of strict invariance.

Suggested Citation

  • Cogley Timothy & Yagihashi Takeshi, 2010. "Are DSGE Approximating Models Invariant to Shifts in Policy?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-33, October.
    • Handle: RePEc:bpj:bejmac:v:10:y:2010:i:1:n:27
    DOI: 10.2202/1935-1690.2048
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    Cited by:

    1. Fabio Canova & Filippo Ferroni & Christian Matthes, 2015. "Approximating Time Varying Structural Models With Time Invariant Structures," Working Paper 15-10, Federal Reserve Bank of Richmond.
    2. Salvador Barrios & Mathias Dolls & Anamaria Maftei & Andreas Peichl & Sara Riscado & Janos Varga & Christian Wittneben, 2019. "Dynamic Scoring Of Tax Reforms In The European Union," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 38(1), pages 239-262, January.
    3. Hurtado, Samuel, 2014. "DSGE models and the Lucas critique," Economic Modelling, Elsevier, vol. 44(S1), pages 12-19.
    4. Gulan, Adam, 2018. "Paradise lost? A brief history of DSGE macroeconomics," Bank of Finland Research Discussion Papers 22/2018, Bank of Finland.
    5. Dolls, Mathias & Wittneben, Christian, 2017. "Dynamic Scoring of Tax Reforms in the EU," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168261, Verein für Socialpolitik / German Economic Association.
    6. Schmidt, Sebastian & Wieland, Volker, 2013. "The New Keynesian Approach to Dynamic General Equilibrium Modeling: Models, Methods and Macroeconomic Policy Evaluation," Handbook of Computable General Equilibrium Modeling, in: Peter B. Dixon & Dale Jorgenson (ed.), Handbook of Computable General Equilibrium Modeling, edition 1, volume 1, chapter 0, pages 1439-1512, Elsevier.
    7. Francesco Sergi, 2018. "DSGE Models and the Lucas Critique. A Historical Appraisal," Working Papers 20181806, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
    8. Senbeta, Sisay, 2011. "How applicable are the new keynesian DSGE models to a typical low-income economy?," MPRA Paper 30931, University Library of Munich, Germany.
    9. repec:zbw:bofrdp:2018_022 is not listed on IDEAS
    10. Gulan, Adam, 2018. "Paradise lost? A brief history of DSGE macroeconomics," Research Discussion Papers 22/2018, Bank of Finland.
    11. Heinrichs, Katrin & Wagner, Helmut, 2019. "Positive trend inflation and the Phillips curve – A tale of two slopes and various impulse responses," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 283-307.
    12. Pesaran, M. Hashem & Smith, Ron P., 2011. "Beyond the DSGE Straitjacket," IZA Discussion Papers 5661, Institute of Labor Economics (IZA).
    13. Fernando J. Pérez Forero, 2017. "Measuring the Stance of Monetary Policy in a Time-Varying," Working Papers 102, Peruvian Economic Association.
    14. Takeshi Yagihashi, 2020. "DSGE Models Used by Policymakers: A Survey," Discussion papers ron333, Policy Research Institute, Ministry of Finance Japan.
    15. Saijo, Hikaru, 2013. "Estimating DSGE models using seasonally adjusted and unadjusted data," Journal of Econometrics, Elsevier, vol. 173(1), pages 22-35.
    16. Yongsung Chang & Sun-Bin Kim & Frank Schorfheide, 2010. "Labor-Market Heterogeneity, Aggregation, and the Lucas Critique," RCER Working Papers 556, University of Rochester - Center for Economic Research (RCER).
    17. Yagihashi, Takeshi, 2018. "How costly is a misspecified credit channel DSGE model in monetary policymaking?," Economic Modelling, Elsevier, vol. 68(C), pages 484-505.

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