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DSGE models and their use in monetary policy

  • Michael Dotsey
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    The past 10 years or so have seen the development of a new class of models that are proving useful for monetary policy: dynamic stochastic general equilibrium (DSGE) models. Many central banks around the world, including the Swedish central bank, the European Central Bank, the Norwegian central bank, and the Federal Reserve, use these models in formulating monetary policy. In this article, Mike Dotsey discusses the major features of DSGE models and why these models are useful to monetary policymakers. He outlines the general way in which they are used in conjunction with other tools commonly employed by monetary policymakers and points out the promise of using these models as well as the pitfalls.

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    File URL: http://philadelphiafed.org/research-and-data/publications/business-review/2013/q2/brq213_dsge-models-and-their-use-in-monetary-policy.pdf
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    Article provided by Federal Reserve Bank of Philadelphia in its journal Business Review.

    Volume (Year): (2013)
    Issue (Month): Q2 ()
    Pages: 10-16

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    Handle: RePEc:fip:fedpbr:y:2013:i:q2:p:10-16
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    1. Justiniano, Alejandro & Primiceri, Giorgio E & Tambalotti, Andrea, 2009. "Investment Shocks and the Relative Price of Investment," CEPR Discussion Papers 7598, C.E.P.R. Discussion Papers.
    2. Marco Del Negro & Frank Schorfheide, 2005. "Monetary policy analysis with potentially misspecified models," Working Papers 06-4, Federal Reserve Bank of Philadelphia.
    3. Michael T. Kiley, 2010. "Output gaps," Finance and Economics Discussion Series 2010-27, Board of Governors of the Federal Reserve System (U.S.).
    4. Wolters, Maik Hendrik, 2012. "Evaluating point and density forecasts of DSGE models," IMFS Working Paper Series 59, Institute for Monetary and Financial Stability (IMFS), Goethe University Frankfurt.
    5. Marco Del Negro & Frank Schorfheide, 2004. "Priors from General Equilibrium Models for VARS," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 643-673, 05.
    6. Hess T. Chung & Michael T. Kiley & Jean-Philippe Laforte, 2010. "Documentation of the Estimated, Dynamic, Optimization-based (EDO) model of the U.S. economy: 2010 version," Finance and Economics Discussion Series 2010-29, Board of Governors of the Federal Reserve System (U.S.).
    7. Roc Armenter, 2011. "Output gaps: uses and limitation," Business Review, Federal Reserve Bank of Philadelphia, issue Q1, pages 1-8.
    8. Wolters, Maik H., 2011. "Forecasting under Model Uncertainty," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48723, Verein für Socialpolitik / German Economic Association.
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