Advanced Search
MyIDEAS: Login to save this paper or follow this series

Monetary policy analysis with potentially misspecified models

Contents:

Author Info

  • Marco Del Negro
  • Frank Schorfheide

Abstract

The paper proposes a novel method for conducting policy analysis with potentially misspecified dynamic stochastic general equilibrium (DSGE) models and applies it to a New Keynesian DSGE model along the lines of Christiano, Eichenbaum, and Evans (JPE2005) and Smets and Wouters (JEEA2003). We first quantify the degree of model misspecification and then illustrate its implications for the performance of different interest-rate feedback rules. We find that many of the prescriptions derived from the DSGE model are robust to model misspecification.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers/2006/wp06-4.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 06-4.

as in new window
Length:
Date of creation: 2005
Date of revision:
Handle: RePEc:fip:fedpwp:06-4

Contact details of provider:
Postal: 10 Independence Mall, Philadelphia, PA 19106-1574
Web page: http://www.philadelphiafed.org/
More information through EDIRC

Order Information:
Email:
Web: http://www.phil.frb.org/econ/wps/index.html

Related research

Keywords: Monetary policy;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Brock, William A. & Durlauf, Steven N. & West, Kenneth D., 2007. "Model uncertainty and policy evaluation: Some theory and empirics," Journal of Econometrics, Elsevier, Elsevier, vol. 136(2), pages 629-664, February.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(1), pages 1-45, February.
  3. Smith, A A, Jr, 1993. "Estimating Nonlinear Time-Series Models Using Simulated Vector Autoregressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 8(S), pages S63-84, Suppl. De.
  4. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy Rules for Inflation Targeting," NBER Working Papers 6512, National Bureau of Economic Research, Inc.
  5. Smets, Frank & Wouters, Raf, 2002. "An estimated stochastic dynamic general equilibrium model of the euro area," Working Paper Series, European Central Bank 0171, European Central Bank.
  6. Sungbae An & Frank Schorfheide, 2006. "Bayesian analysis of DSGE models," Working Papers, Federal Reserve Bank of Philadelphia 06-5, Federal Reserve Bank of Philadelphia.
  7. Marco Del Negro & Frank Schorfheide, 2005. "Policy Predictions if the Model Does Not Fit," Journal of the European Economic Association, MIT Press, MIT Press, vol. 3(2-3), pages 434-443, 04/05.
  8. Sargent, Thomas J, 1989. "Two Models of Measurements and the Investment Accelerator," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(2), pages 251-87, April.
  9. Yongsung Chang & Sun-Bin Kim, 2003. "From Individual to Aggregate Labor Supply: A Quantitative Analysis Based on a Heterogeneous Agent Macroeconomy," Macroeconomics, EconWPA 0307003, EconWPA.
  10. Ireland, Peter N., 2004. "A method for taking models to the data," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(6), pages 1205-1226, March.
  11. Smets, Frank & Wouters, Raf, 2007. "Shocks and frictions in US business cycles: a Bayesian DSGE approach," Working Paper Series, European Central Bank 0722, European Central Bank.
  12. Marco Del Negro & Frank Schorfheide & Frank Smets & Raf Wouters, 2004. "On the fit and forecasting performance of New Keynesian models," Working Paper, Federal Reserve Bank of Atlanta 2004-37, Federal Reserve Bank of Atlanta.
  13. Robert J. Tetlow & Peter von zur Muehlen, 2000. "Robust monetary policy with misspecified models: does model uncertainty always call for attenuated policy?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2000-28, Board of Governors of the Federal Reserve System (U.S.).
  14. Noah Williams & Andrew Levin & Alexei Onatski, 2005. "Monetary Policy under Uncertainty in Micro-Founded Macroeconometric Models," Computing in Economics and Finance 2005, Society for Computational Economics 478, Society for Computational Economics.
  15. Roger E. A. Farmer & Andreas Beyer, 2004. "On the Indeterminacy of New Keynesian Economics," 2004 Meeting Papers, Society for Economic Dynamics 187, Society for Economic Dynamics.
  16. Poirier, Dale J., 1998. "Revising Beliefs In Nonidentified Models," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 14(04), pages 483-509, August.
  17. Fabio Canova & Luca Sala, 2005. "Back to square one: Identification issues in DSGE models," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 927, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 2006.
  18. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, American Economic Association, vol. 90(3), pages 367-390, June.
  19. Levin, Andrew T. & Williams, John C., 2003. "Robust monetary policy with competing reference models," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(5), pages 945-975, July.
  20. Alexei Onatski & Noah Williams, 2003. "Modeling Model Uncertainty," Journal of the European Economic Association, MIT Press, MIT Press, vol. 1(5), pages 1087-1122, 09.
  21. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Business cycle accounting," Working Papers, Federal Reserve Bank of Minneapolis 625, Federal Reserve Bank of Minneapolis.
  22. Alan S. Blinder & Ricardo Reis, 2005. "Understanding the Greenspan Standard," Working Papers, Princeton University, Department of Economics, Center for Economic Policy Studies. 88, Princeton University, Department of Economics, Center for Economic Policy Studies..
  23. Glenn D. Rudebusch, 2001. "Is The Fed Too Timid? Monetary Policy In An Uncertain World," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 83(2), pages 203-217, May.
  24. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 29(1), pages 173-203, January.
  25. Michele Boldrin & Lawrence J. Christiano & Jonas D. M. Fisher, 2000. "Habit persistence, asset returns and the business cycle," Staff Report, Federal Reserve Bank of Minneapolis 280, Federal Reserve Bank of Minneapolis.
  26. Mark Bils & Peter J. Klenow, 2002. "Some Evidence on the Importance of Sticky Prices," NBER Working Papers 9069, National Bureau of Economic Research, Inc.
  27. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Society for Computational Economics, Society for Computational Economics, vol. 20(1-2), pages 1-20, October.
  28. Del Negro, Marco & Schorfheide, Frank & Smets, Frank & Wouters, Rafael, 2007. "On the Fit of New Keynesian Models," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 25, pages 123-143, April.
  29. Coenen, Günter, 2003. "Inflation persistence and robust monetary policy design," Working Paper Series, European Central Bank 0290, European Central Bank.
  30. Andrew Levin & Volker Wieland & John C. Williams, 1998. "Robustness of simple monetary policy rules under model uncertainty," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1998-45, Board of Governors of the Federal Reserve System (U.S.).
  31. Adalid, Ramon & Coenen, Gunter & McAdam, Peter & Siviero, Stefano, 2005. "The Performance and Robustness of Interest-Rate Rules in Models of the Euro Area," MPRA Paper 821, University Library of Munich, Germany.
  32. Alejandro Justiniano & Giorgio E. Primiceri, 2006. "The Time Varying Volatility of Macroeconomic Fluctuations," NBER Working Papers 12022, National Bureau of Economic Research, Inc.
  33. Miles S. Kimball & Matthew D. Shapiro, 2008. "Labor Supply: Are the Income and Substitution Effects Both Large or Both Small?," NBER Working Papers 14208, National Bureau of Economic Research, Inc.
  34. Andrew Levin & Volker Wieland & John C. Williams, 2003. "The Performance of Forecast-Based Monetary Policy Rules Under Model Uncertainty," American Economic Review, American Economic Association, American Economic Association, vol. 93(3), pages 622-645, June.
  35. Alexei Onatski & James H. Stock, 1999. "Robust monetary policy under model uncertainty in a small model of the U.S. economy," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco.
  36. Thomas Lubik & Frank Schorfheide, 2005. "A Bayesian Look at New Open Economy Macroeconomics," Economics Working Paper Archive, The Johns Hopkins University,Department of Economics 521, The Johns Hopkins University,Department of Economics.
  37. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number tayl99-1.
  38. Giannoni, Marc P., 2002. "Does Model Uncertainty Justify Caution? Robust Optimal Monetary Policy In A Forward-Looking Model," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 6(01), pages 111-144, February.
  39. Craine, Roger, 1979. "Optimal monetary policy with uncertainty," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 1(1), pages 59-83, February.
  40. Martin Eichenbaum & Jonas D.M. Fisher, 2003. "Evaluating the Calvo model of sticky prices," Working Paper Series, Federal Reserve Bank of Chicago WP-03-23, Federal Reserve Bank of Chicago.
  41. Alexei Onatski & Noah Williams, 2004. "Empirical and policy performance of a forward-looking monetary model," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Mar.
  42. Peter Isard & Douglas Laxton & Ann-Charlotte Eliasson, 1999. "Simple Monetary Policy Rules Under Model Uncertainty," Computing in Economics and Finance 1999, Society for Computational Economics 841, Society for Computational Economics.
  43. Marco Del Negro & Frank Schorfheide, 2002. "Priors from general equilibrium models for VARs," Working Paper, Federal Reserve Bank of Atlanta 2002-14, Federal Reserve Bank of Atlanta.
  44. Glenn Rudebusch, 2000. "Assessing Nominal Income Rules for Monetary Policy with Model and Data Uncertainty," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 0065, Econometric Society.
  45. Christopher A. Sims, 1982. "Policy Analysis with Econometric Models," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, Economic Studies Program, The Brookings Institution, vol. 13(1), pages 107-164.
  46. Timothy Cogley & Thomas J. Sargent, 2005. "The conquest of US inflation: Learning and robustness to model uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 528-563, April.
  47. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1345-70, November.
  48. Giorgio Primiceri & Ernst Schaumburg & Andrea Tambalotti, 2006. "Intertemporal disturbances," 2006 Meeting Papers, Society for Economic Dynamics 355, Society for Economic Dynamics.
  49. Ingram, Beth F. & Whiteman, Charles H., 1994. "Supplanting the 'Minnesota' prior: Forecasting macroeconomic time series using real business cycle model priors," Journal of Monetary Economics, Elsevier, Elsevier, vol. 34(3), pages 497-510, December.
  50. Frank Schorfheide, 2000. "Loss function-based evaluation of DSGE models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 15(6), pages 645-670.
  51. repec:cup:macdyn:v:6:y:2002:i:1:p:85-110 is not listed on IDEAS
  52. Alejandro Justiniano & Northwestern University, 2006. "The Time Varying Volatility of Macroeconomic Fluctuations," Computing in Economics and Finance 2006, Society for Computational Economics 219, Society for Computational Economics.
  53. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  54. repec:cup:macdyn:v:6:y:2002:i:1:p:111-44 is not listed on IDEAS
  55. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 195-214, December.
  56. Narayana Kocherlakota, 2007. "Model fit and model selection," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Jul, pages 349-360.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fip:fedpwp:06-4. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Beth Paul).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.