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DSGE models and their use in monetary policy

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  • Michael Dotsey
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    Abstract

    The past 10 years or so have seen the development of a new class of models that are proving useful for monetary policy: dynamic stochastic general equilibrium (DSGE) models. Many central banks around the world, including the Swedish central bank, the European Central Bank, the Norwegian central bank, and the Federal Reserve, use these models in formulating monetary policy. In this article, Mike Dotsey discusses the major features of DSGE models and why these models are useful to monetary policymakers. He outlines the general way in which they are used in conjunction with other tools commonly employed by monetary policymakers and points out the promise of using these models as well as the pitfalls.

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    Bibliographic Info

    Article provided by Federal Reserve Bank of Philadelphia in its journal Business Review.

    Volume (Year): (2013)
    Issue (Month): Q2 ()
    Pages: 10-16

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    Handle: RePEc:fip:fedpbr:y:2013:i:q2:p:10-16

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    Related research

    Keywords: Monetary policy;

    References

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    1. Michael Kiley, 2010. "Output gaps," 2010 Meeting Papers 266, Society for Economic Dynamics.
    2. Marco Del Negro & Frank Schorfheide, 2008. "Monetary policy analysis with potentially misspecified models," Staff Reports 321, Federal Reserve Bank of New York.
    3. Alejandro Justiniano & Giorgio E. Primiceri & Andrea Tambalotti, 2009. "Investment shocks and the relative price of investment," Staff Reports 411, Federal Reserve Bank of New York.
    4. Wolters, Maik Hendrik, 2012. "Evaluating point and density forecasts of DSGE models," MPRA Paper 36147, University Library of Munich, Germany.
    5. Hess T. Chung & Michael T. Kiley & Jean-Philippe Laforte, 2010. "Documentation of the Estimated, Dynamic, Optimization-based (EDO) model of the U.S. economy: 2010 version," Finance and Economics Discussion Series 2010-29, Board of Governors of the Federal Reserve System (U.S.).
    6. Roc Armenter, 2011. "Output gaps: uses and limitation," Business Review, Federal Reserve Bank of Philadelphia, issue Q1, pages 1-8.
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