Great Moderation debate: should we be worry about using approximated policy functions?
AbstractIs the evidence favouring a change in the monetary policy rule during the early 80’s biased by the omission of relevant terms in the approximated policy function? Can we use Bayesian estimation of Dynamic Stochastic General Equilibrium (DSGE) models to provide evidence supporting the “good luck” or “good policy” hypotheses as competing explanations of the Great Moderation? In this paper I shed light on the magnitude of the bias generated by the omission of second order terms in the approximated policy functions used in Bayesian econometrics. The results of this study show that this bias is not important for high volatility periods such as the one experimented between the 60’s and 70’s.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 659.
Date of creation: 2008
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