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System Priors: Formulating Priors about DSGE Models' Properties

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  • Michal Andrle
  • Jaromir Benes

Abstract

This paper proposes a novel way of formulating priors for estimating economic models. System priors are priors about the model's features and behavior as a system, such as the sacrifice ratio or the maximum duration of response of inflation to a particular shock, for instance. System priors represent a very transparent and economically meaningful way of formulating priors about parameters, without the unintended consequences of independent priors about individual parameters. System priors may complement or also substitute for independent marginal priors. The new philosophy of formulating priors is motivated, explained and illustrated using a structural model for monetary policy.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/257.

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Length: 26
Date of creation: 19 Dec 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/257

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Related research

Keywords: Economic models; Monetary policy; system priors; Bayesian inference; DSGE; smell test; parameters; inflation; monetary economics; central bank; monetary model; monetary fund; monetary authority; monetary policy rule; optimal monetary policy; inflation-targeting; science and technology;

This paper has been announced in the following NEP Reports:

References

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  1. Coenen, Günter & Levin, Andrew T., 2004. "Identifying the influences of nominal and real rigidities in aggregate price-setting behavior," Working Paper Series 0418, European Central Bank.
  2. Jon Faust & Abhishek Gupta, 2012. "Posterior Predictive Analysis for Evaluating DSGE Models," NBER Working Papers 17906, National Bureau of Economic Research, Inc.
  3. Stephen J. Turnovsky, 2000. "Methods of Macroeconomic Dynamics, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262201232, December.
  4. Mattias Villani, 2009. "Steady-state priors for vector autoregressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(4), pages 630-650.
  5. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  6. Douglas Laxton & Paolo Pesenti, 2003. "Monetary Rules for Small, Open, Emerging Economies," NBER Working Papers 9568, National Bureau of Economic Research, Inc.
  7. Roberto Garcia-Saltos & Douglas Laxton & Michal Andrle & Haris Munandar & Charles Freedman & Danny Hermawan, 2009. "Adding Indonesia to the Global Projection Model," IMF Working Papers 09/253, International Monetary Fund.
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