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Bayesian Dynamic Factor Analysis of a Simple Monetary DSGE Model

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  • Maxym Kryshko
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    Abstract

    When estimating DSGE models, the number of observable economic variables is usually kept small, and it is conveniently assumed that DSGE model variables are perfectly measured by a single data series. Building upon Boivin and Giannoni (2006), we relax these two assumptions and estimate a fairly simple monetary DSGE model on a richer data set. Using post-1983 U.S.data on real output, inflation, nominal interest rates, measures of inverse money velocity, and a large panel of informational series, we compare the data-rich DSGE model with the regular - few observables, perfect measurement - DSGE model in terms of deep parameter estimates, propagation of monetary policy and technology shocks and sources of business cycle fluctuations. We document that the data-rich DSGE model generates a higher implied duration of Calvo price contracts and a lower slope of the New Keynesian Phillips curve. To reduce the computational costs of the likelihood-based estimation, we employed a novel speedup as in Jungbacker and Koopman (2008) and achieved the time savings of 60 percent.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/219.

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    Length: 60
    Date of creation: 01 Sep 2011
    Date of revision:
    Handle: RePEc:imf:imfwpa:11/219

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    Related research

    Keywords: Economic models; inflation; monetary policy; real output; money demand; money balances; gdp deflator; real money; monetary base; aggregate demand; nominal interest rate; money stock; rational expectations; monetary economics; central bank; nominal interest rates; foreign exchange; inflation rate; reserve requirements; monetary aggregate; real interest rate; monetary aggregates; price inflation; price level; steady-state inflation; high interest rates; contractionary monetary policy; monetary fund; relative price; rate of inflation; money base; monetary policy rule; monetary theory; optimal monetary policy; money stocks; monetary policy regime; inflationary expectations; monetary authority; monetary economy;

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