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Solution-Driven Specification of DSGE Models

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Author Info

  • Francisco Blasques

    (VU University Amsterdam)

Abstract

This paper proposes a functional specification approach for dynamic stochastic general equilibrium (DSGE) models that explores the properties of the solution method used to approximate policy functions. In particular, the solution-driven specification takes the properties of the solution method directly into account when designing the structural model in order to deliver enhanced flexibility and facilitate parameter identification within the structure imposed by the underlying economic theory. A prototypical application reveals the importance of this method in improving the specification of functional nonlinearities that are consistent with economic theory. The solution-driven specification is also shown to have the potential to greatly improve model fit and provide alternative policy recommendations when compared to standard DSGE model designs.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 13-062/III.

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Date of creation: 19 Apr 2013
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Handle: RePEc:dgr:uvatin:20130062

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Web page: http://www.tinbergen.nl

Related research

Keywords: Nonlinear Model Specification; DSGE; Perturbation Solutions;

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  1. W. Erwin Diewert & T.J. Wales, 1989. "Flexible Functional Forms and Global Curvature Conditions," NBER Technical Working Papers 0040, National Bureau of Economic Research, Inc.
  2. S. B. Aruoba & Jesús Fernández-Villaverde & Juan F. Rubio-Ramirez, 2005. "Comparing Solution Methods for Dynamic Equilibrium Economies," Levine's Bibliography 122247000000000855, UCLA Department of Economics.
  3. Gourieroux, C. & Monfort, A. & Renault, E., 1992. "Indirect Inference," Papers 92.279, Toulouse - GREMAQ.
  4. Ruge-Murcia, Francisco, 2012. "Estimating nonlinear DSGE models by the simulated method of moments: With an application to business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 36(6), pages 914-938.
  5. Judd, Kenneth L., 1992. "Projection methods for solving aggregate growth models," Journal of Economic Theory, Elsevier, vol. 58(2), pages 410-452, December.
  6. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, December.
  7. Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Solving Dynamic General Equilibrium Models Using a Second-Order Approximation to the Policy Function," NBER Technical Working Papers 0282, National Bureau of Economic Research, Inc.
  8. Fernandez-Villaverde, Jesus & Rubio-Ramirez, Juan F., 2006. "Solving DSGE models with perturbation methods and a change of variables," Journal of Economic Dynamics and Control, Elsevier, vol. 30(12), pages 2509-2531, December.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Solution-Driven Specification of DSGE Models
    by Christian Zimmermann in NEP-DGE blog on 2013-05-08 13:34:28

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