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Identification versus misspecification in New Keynesian monetary policy models

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  • Adolfson, Malin
  • Laséen, Stefan
  • Lindé, Jesper
  • Ratto, Marco

Abstract

In this paper, we study identification and misspecification problems in standard closed and open-economy empirical New-Keynesian DSGE models used in monetary policy analysis. We find that problems with model misspecification still appear to be a first-order issue in monetary DSGE models, and argue that it is problems with model misspecification that may benefit the most from moving from a classical to a Bayesian framework. We also argue that lack of identification should neither be ignored nor be assumed to affect all DSGE models. Fortunately, identification problems can be readily assessed on a case-by-case basis, by applying recently developed pre-tests of identification.

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  • Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Ratto, Marco, 2019. "Identification versus misspecification in New Keynesian monetary policy models," European Economic Review, Elsevier, vol. 113(C), pages 225-246.
    • Handle: RePEc:eee:eecrev:v:113:y:2019:i:c:p:225-246
    DOI: 10.1016/j.euroecorev.2018.12.010
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    More about this item

    Keywords

    Bayesian estimation; Monte-Carlo methods; Maximum likelihood estimation; DSGE Model; Closed economy; Open economy;
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    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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