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Assessing the fit of small open economy DSGEs

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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_and_publications/discussion_papers/2006/dp06_11.pdf
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Bibliographic Info

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
Date of revision:
Handle: RePEc:nzb:nzbdps:2006/11

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  1. Burstein, Ariel Tomas & Eichenbaum, Martin & Rebelo, Sérgio, 2005. "The Importance of Nontradeable Goods' Prices in Cyclical Real Exchange Rate Fluctuations," CEPR Discussion Papers 5306, C.E.P.R. Discussion Papers.
  2. 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.
  3. Jesús Fernández-Villaverde & Juan F. Rubio-Ramirez & Thomas J. Sargent & Mark Watson, 2006. "A,B,C's (and D's)'s for Understanding VARS," Levine's Bibliography 321307000000000646, UCLA Department of Economics.
  4. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 113-172.
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  7. 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.
  8. Jordi Gal� & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
  9. 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.
  10. 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.
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  16. Stephen Murchison & Andrew Rennison, 2006. "ToTEM: The Bank of Canada's New Quarterly Projection Model," Technical Reports 97, Bank of Canada.
  17. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models—Rejoinder," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 211-219.
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Citations

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Cited by:
  1. Senbeta, Sisay, 2011. "How applicable are the new keynesian DSGE models to a typical low-income economy?," MPRA Paper 30931, University Library of Munich, Germany.
  2. Julien Albertini & Güneş Kamber & Michael Kirker, 2011. "An estimated small open economy model with frictional unemployment," Reserve Bank of New Zealand Discussion Paper Series DP2011/04, Reserve Bank of New Zealand.
  3. Bloor, Chris & Matheson, Troy, 2011. "Real-time conditional forecasts with Bayesian VARs: An application to New Zealand," The North American Journal of Economics and Finance, Elsevier, vol. 22(1), pages 26-42, January.
  4. Sam Warburton & Kirdan Lees, 2005. "A happy "halfway-house"? Medium term inflation targeting in New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2005/03, Reserve Bank of New Zealand.
  5. Özer Karagedikli & Troy Matheson & Christie Smith & Shaun Vahey, 2008. "RBCs and DSGEs: The Computational Approach to Business Cycle Theory and Evidence," Working Paper 2008/17, Norges Bank.
  6. Matheson, Troy D., 2008. "Phillips curve forecasting in a small open economy," Economics Letters, Elsevier, vol. 98(2), pages 161-166, February.
  7. SENBETA, Sisay Regassa, 2013. "Informality and macroeconomic fluctuations: A small open economy New Keynesian DSGE model with dual labour markets," Working Papers 2013002, University of Antwerp, Faculty of Applied Economics.
  8. Senbeta, Sisay, 2011. "A small open economy New Keynesian model for a foreign exchange constrained economy," MPRA Paper 29996, University Library of Munich, Germany.
  9. de Silva, Ashton, 2008. "Forecasting macroeconomic variables using a structural state space model," MPRA Paper 11060, University Library of Munich, Germany.
  10. SENBETA, Sisay Regassa, 2011. "A small open economy new Keynesian DSGE model for a foreign exchange constrained economy," Working Papers 2011004, University of Antwerp, Faculty of Applied Economics.

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