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Evaluating misspecification in DSGE models using tests for overidentifying restrictions

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  • Reicher, Christopher Phillip

Abstract

In this paper I discuss the estimation of the process governing the structural shocks (or wedges) to a DSGE model, arguing that a well-specified model would satisfy certain sets of moment conditions. Based on tests for overidentifying restrictions, I compare three specifications of the Taylor rule within a simple New Keynesian model. I find that a rule which allows for the Fed to respond to four lags of inflation shows less evidence of misspecification than one where the Fed responds only to contemporaneous inflation. Raising the coe cient on the output gap to 1 instead of 0.5 gives more ambiguous results. --

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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79955.

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Date of creation: 2013
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Handle: RePEc:zbw:vfsc13:79955

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Web page: http://www.socialpolitik.org/
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  1. V V Chari & Patrick J Kehoe & Ellen R. McGrattan, 2003. "Business Cycle Accounting," Levine's Bibliography 506439000000000421, UCLA Department of Economics.
  2. Del Negro, Marco & Schorfheide, Frank, 2005. "Monetary policy analysis with potentially misspecified models," Working Paper Series 0475, European Central Bank.
  3. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  4. Christopher Reicher, 2013. "A note on the identification of dynamic economic models with generalized shock processes," Kiel Working Papers 1821, Kiel Institute for the World Economy.
  5. Smets, Frank & Wouters, Rafael, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," CEPR Discussion Papers 6112, C.E.P.R. Discussion Papers.
  6. Federico Ravenna, 2005. "Vector Autoregressions and Reduced Form Representations of DSGE Models," 2005 Meeting Papers 841, Society for Economic Dynamics.
  7. Marco Del Negro & Frank Schorfheide, 2002. "Priors from general equilibrium models for VARs," Working Paper 2002-14, Federal Reserve Bank of Atlanta.
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