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Are DSGE Approximating Models Invariant to Shifts in Policy?


  • Cogley Timothy

    () (New York University)

  • Yagihashi Takeshi

    () (College of Staten Island)


Bayesian and maximum-likelihood estimates of structural parameters in DSGE approximating models are invariant to shifts in policy only when the model is correctly specified. Since DSGE models are approximations, strict invariance is unattainable. Despite that, DSGE models might be useful for policy analysis provided that structural parameters are approximately invariant. We discuss this issue in the context of an example involving a pair of new Keynesian DSGE models in which the central bank's policy model includes a misspecified Phillips curve. In our example, the approximating model is a useful guide for policy despite the failure of strict invariance.

Suggested Citation

  • Cogley Timothy & Yagihashi Takeshi, 2010. "Are DSGE Approximating Models Invariant to Shifts in Policy?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-33, October.
  • Handle: RePEc:bpj:bejmac:v:10:y:2010:i:1:n:27

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    References listed on IDEAS

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    7. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
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    Cited by:

    1. Canova, Fabio & Ferroni, Filippo & Matthes, Christian, 2015. "Approximating Time Varying Structural Models With Time Invariant Structures," Working Paper 15-10, Federal Reserve Bank of Richmond.
    2. Salvador Barrios & Mathias Dolls & Anamaria Maftei & Andreas Peichl & Sara Riscado & Janos Varga & Christian Wittneben, 2016. "Dynamic scoring of tax reforms in the European Union," JRC Working Papers on Taxation & Structural Reforms 2016-03, Joint Research Centre (Seville site).
    3. Hurtado, Samuel, 2014. "DSGE models and the Lucas critique," Economic Modelling, Elsevier, vol. 44(S1), pages 12-19.
    4. Dolls, Mathias & Wittneben, Christian, 2017. "Dynamic Scoring of Tax Reforms in the EU," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168261, Verein für Socialpolitik / German Economic Association.
    5. Schmidt, Sebastian & Wieland, Volker, 2013. "The New Keynesian Approach to Dynamic General Equilibrium Modeling: Models, Methods and Macroeconomic Policy Evaluation," Handbook of Computable General Equilibrium Modeling, Elsevier.
    6. 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.
    7. Pesaran, M. Hashem & Smith, Ron P., 2011. "Beyond the DSGE Straitjacket," IZA Discussion Papers 5661, Institute for the Study of Labor (IZA).
    8. Fernando J. Pérez Forero, 2017. "Measuring the Stance of Monetary Policy in a Time-Varying," Working Papers 2017-102, Peruvian Economic Association.
    9. Saijo, Hikaru, 2013. "Estimating DSGE models using seasonally adjusted and unadjusted data," Journal of Econometrics, Elsevier, vol. 173(1), pages 22-35.
    10. Yongsung Chang & Sun-Bin Kim & Frank Schorfheide, 2010. "Labor-Market Heterogeneity, Aggregation, and the Lucas Critique," RCER Working Papers 556, University of Rochester - Center for Economic Research (RCER).
    11. repec:eee:ecmode:v:68:y:2018:i:c:p:484-505 is not listed on IDEAS

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