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Endogenous Persistence in an Estimated DSGE Model under Imperfect Information

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  • Paul Levine

    (University of Surrey)

  • Joseph Pearlman

    (London Metropolitan University)

  • George Perendia

    (London Metropolitan University)

  • Bo Yang

    (University of Surrey)

Abstract

We provide a tool for estimating DSGE models by BayesianMaximum-likelihood methods under very general information assumptions. This framework is applied to a New Keynesian model where we compare the standard approach, that assumes an informational asymmetry between private agents and the econometrician, with an assumption of informational symmetry. For the former, private agents observe all state variables including shocks, whereas the econometrician uses only data for output, inflation and interest rates. For the latter both agents have the same imperfect information set and this corresponds to what we term the 'informational consistency principle'. We first assume rational expectations and then generalize the model to allow some households and firms to form expectations adaptively. We find that in terms of model posterior probabilities, impulse responses, second moments and autocorrelations, the assumption of informational symmetry by rational agents significantly improves the model fit. We also find qualified empirical support for the heterogenous expectations model. JEL Classification: C11, C52, E12, E32.

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Bibliographic Info

Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 0310.

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Length: 43 pages
Date of creation: Apr 2010
Date of revision:
Handle: RePEc:sur:surrec:0310

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Keywords: Imperfect Information; DSGE Model; Rational versus Adaptive Expectations; Bayesian Estimation;

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References

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  1. Marco Del Negro & Frank Schorfheide, 2002. "Priors from general equilibrium models for VARs," Working Paper 2002-14, Federal Reserve Bank of Atlanta.
  2. Del Negro, Marco & Schorfheide, Frank & Smets, Frank & Wouters, Rafael, 2005. "On the Fit and Forecasting Performance of New Keynesian Models," CEPR Discussion Papers 4848, C.E.P.R. Discussion Papers.
  3. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Solving Dynamic General Equilibrium Models Using a Second-Order Approximation to the Policy Function," Departmental Working Papers 200106, Rutgers University, Department of Economics.
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Cited by:
  1. Villa, Stefania, 2013. "Financial frictions in the euro area: a Bayesian assessment," Working Paper Series 1521, European Central Bank.
  2. Paul Levine, 2010. "Monetary Policy in an Uncertain World: Probability Models and the Design of Robust Monetary Rules," School of Economics Discussion Papers 0210, School of Economics, University of Surrey.
  3. Gelain, Paolo & Lansing, Kevin J. & Mendicino, Caterina, 2012. "House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macroprudential Policy," Dynare Working Papers 21, CEPREMAP.
  4. Perendia, George & Tsoukis, Chris, 2012. "The Keynesian multiplier, news and fiscal policy rules in a DSGE model," Dynare Working Papers 25, CEPREMAP.
  5. Paolo Gelain & Kevin J. Lansing, 2013. "House prices, expectations, and time-varying fundamentals," Working Paper Series 2013-03, Federal Reserve Bank of San Francisco.
  6. Batini, Nicoletta & Levine, Paul & Lotti, Emanuela & Yang, Bo, 2011. "Monetary and Fiscal Policy in the Presence of Informal Labour Markets," Working Papers 11/97, National Institute of Public Finance and Policy.
  7. Fabio Milani, 2012. "The Modeling of Expectations in Empirical DSGE Models: a Survey," Working Papers 121301, University of California-Irvine, Department of Economics.
  8. Tom Holden, 2012. "Learning from learners," School of Economics Discussion Papers 1512, School of Economics, University of Surrey.
  9. Paul Levine, 2012. "Policy focus: Monetary policy in an uncertain world: probability models and the design of robust monetary rules," Indian Growth and Development Review, Emerald Group Publishing, vol. 5(1), pages 70-88, April.
  10. Fabio Milani & Ashish Rajbhandari, 2012. "Expectation Formation and Monetary DSGE Models: Beyond the Rational Expectations Paradigm," Working Papers 111212, University of California-Irvine, Department of Economics.
  11. Paul Levine & Joseph Pearlman & Bo Yang, 2012. "Imperfect Information, Optimal Monetary Policy and Informational Consistency," School of Economics Discussion Papers 1012, School of Economics, University of Surrey.

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