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Assessing the fit of small open economy DSGEs

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Author Info
Troy Matheson (Reserve Bank of New Zealand)

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Abstract

We describe a simple extension of the Monacelli (2005) small open economy model that incorporates a non-tradable good, habit persistence and price indexation. The empirical fit of eight different specifications of this model is then tested in a Bayesian framework using data for three small open economies: Australia, Canada, and New Zealand. The results show that the model with a non-tradable good fits the data better than the one-good model across all specifications considered. In contrast to Rabanal and Rubio-Ramarez (2005), we find that adding price indexation to either the one- or two-good model deteriorates overall empirical fit.

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File URL: http://www.rbnz.govt.nz/research/discusspapers/dp06_11.pdf
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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2006/11.

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Length: 36 p.
Date of creation: Dec 2006
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Handle: RePEc:nzb:nzbdps:2006/11

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Find related papers by JEL classification:
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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  1. Sungbae An & Frank Schorfheide, 2006. "Bayesian analysis of DSGE models," Working Papers 06-5, Federal Reserve Bank of Philadelphia. [Downloadable!]
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  2. Jesús Fernández-Villaverde & Juan F. Rubio-Ramirez & Thomas J. Sargent, 2005. "A,B,C's (and D's)'s for Understanding VARS," Levine's Bibliography 172782000000000096, UCLA Department of Economics. [Downloadable!]
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  3. Rabanal, Pau & Rubio-Ramirez, Juan F., 2005. "Comparing New Keynesian models of the business cycle: A Bayesian approach," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1151-1166, September. [Downloadable!] (restricted)
  4. Burstein, Ariel & Eichenbaum, Martin & Rebelo, Sergio, 2006. "The importance of nontradable goods' prices in cyclical real exchange rate fluctuations," Japan and the World Economy, Elsevier, vol. 18(3), pages 247-253, August. [Downloadable!] (restricted)
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  5. Douglas Laxton & Paolo Pesenti, 2003. "Monetary Rules for Small, Open, Emerging Economies," NBER Working Papers 9568, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Charles Engel, 1999. "Accounting for U.S. Real Exchange Rate Changes," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 507-538, June. [Downloadable!] (restricted)
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  7. Marco Del Negro & Frank Schorfheide, 2004. "Priors from General Equilibrium Models for VARS," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 643-673, 05. [Downloadable!] (restricted)
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  8. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October. [Downloadable!] (restricted)
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  9. John Geweke, 1999. "Using Simulation Methods for Bayesian Econometric Models," Computing in Economics and Finance 1999 832, Society for Computational Economics.
  10. Jose De Gregorio & Holger C. Wolf & Alberto Giovannini, 1994. "International Evidence on Tradables and Nontradables Inflation," IMF Working Papers 94/33, International Monetary Fund.
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  11. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Blackwell Publishing, vol. 72(3), pages 707-734, 07. [Downloadable!] (restricted)
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  12. Ana Maria Santacreu, 2005. "Reaction functions in a small open economy: What role for non-traded inflation?," Reserve Bank of New Zealand Discussion Paper Series DP2005/04, Reserve Bank of New Zealand. [Downloadable!]
  13. Marco Del Negro & Frank Schorfheide & Frank Smets & Raf Wouters, 2005. "On the fit and forecasting performance of New-Keynesian models," Working Paper Series 491, European Central Bank. [Downloadable!]
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  14. Troy Matheson, 2006. "Phillips curve forecasting in a small open economy," Reserve Bank of New Zealand Discussion Paper Series DP2006/01, Reserve Bank of New Zealand. [Downloadable!]
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  15. Lawrence J. Christiano, Martin Eichenbaum, and Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
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