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Macroeconometric equivalence, microeconomic dissonance, and the design of monetary policy

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  • Levin, Andrew T.
  • David López-Salido, J.
  • Nelson, Edward
  • Yun, Tack

Abstract

Macroeconometric equivalence means that estimates of DSGE models using first-order approximations to equilibrium conditions fail to distinguish between alternative preference/technology configurations. Microeconomic dissonance means that the underlying microeconomic differences between ostensibly equivalent models become important when optimal monetary policy is derived. The relevance of these concepts is established by analysis of optimal monetary policy using a small-scale New Keynesian model. Microeconomic and financial datasets are promising tools with which to overcome the equivalence/dissonance problem.

Suggested Citation

  • Levin, Andrew T. & David López-Salido, J. & Nelson, Edward & Yun, Tack, 2008. "Macroeconometric equivalence, microeconomic dissonance, and the design of monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages 48-62, October.
  • Handle: RePEc:eee:moneco:v:55:y:2008:i:s1:p:s48-s62
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