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Policy analysis using DSGE models: an introduction

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  • Argia M. Sbordone
  • Andrea Tambalotti
  • Krishna Rao
  • Kieran Walsh

Abstract

Many central banks have come to rely on dynamic stochastic general equilibrium, or DSGE, models to inform their economic outlook and to help formulate their policy strategies. But while their use is familiar to policymakers and academics, these models are typically not well known outside these circles. This article introduces the basic structure, logic, and application of the DSGE framework to a broader public by providing an example of its use in monetary policy analysis. The authors present and estimate a simple New Keynesian DSGE model, highlighting the core features that this basic specification shares with more elaborate versions. They then apply the estimated model to study the sources of the sudden increase in inflation that occurred in the first half of 2004. One important lesson derived from this exercise is that the management of expectations can be a more effective tool for stabilizing inflation than actual movements in the policy rate. This result is consistent with the increasing focus on the pronouncements of central bankers regarding their future actions.

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Bibliographic Info

Article provided by Federal Reserve Bank of New York in its journal Economic Policy Review.

Volume (Year): (2010)
Issue (Month): Oct ()
Pages: 23-43

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Handle: RePEc:fip:fednep:y:2010:i:oct:p:23-43:n:v.16no.2

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Keywords: Econometric models ; Stochastic analysis ; Keynesian economics ; Inflation (Finance) ; Monetary policy ; Banks and banking; Central;

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Cited by:
  1. Sinitskaya, Ekaterina & Tesfatsion, Leigh, 2014. "Macroeconomies as Constructively Rational Games," Staff General Research Papers 37834, Iowa State University, Department of Economics.
  2. Francisco Sáez & Fernando Alvarez & Jesús Morales & Giovanni Guedez, 2011. "Expectations, Inter-Sectorial Relationships and the Business Cycle," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(63), pages 97-147, July - Se.
  3. Martin Seneca, 2010. "A DSGE model for Iceland," Economics wp50, Department of Economics, Central bank of Iceland.
  4. Zhicheng Zhou & Prapatchon Jariyapan, 2013. "The impact of macroeconomic policies to real estate market in People's Republic of China," The Empirical Econometrics and Quantitative Economics Letters, Faculty of Economics, Chiang Mai University, vol. 2(3), pages 75 - 92, September.
  5. Horacio A. Aguirre, 2011. "On the “Science” of Monetary Policy: Methodological Notes," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(64), pages 83-115, October -.

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