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Empirical and policy performance of a forward-looking monetary model

Author

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  • Alexei Onatski

    (Department of Economics, Columbia University, New York, NY, USA)

  • Noah Williams

    (Department of Economics, University of Wisconsin-Madison, WI, USA)

Abstract

In this paper we consider the implications of a fully specified dynamic general equilibrium model, developed by Smets and Wouters (2003). This is a relatively large-scale forward-looking model, which was shown to provide a good fit to the data. We show that systematically accounting for prior uncertainty may lead to substantially different parameter estimates. However many of the qualitative features of the model remain similar under the alternative estimates that we find. We then formulate and analyze optimal policy rules in the model, focusing on a simple loss function which is commonly used and is independent of the estimates. We determine the optimal equilibrium dynamics for our estimates as well as those of Smets and Wouters, and find that they imply largely similar behavior. We then analyze simple policy rules, finding that these rules perform relatively well and are robust to our different sets of parameter estimates. Overall, our results suggest that the model may be relatively robust in its ability to capture certain aspects of the data. However some caution should be exercised in basing inference on the structural estimates, as these seem to be only weakly identified. Copyright © 2009 John Wiley & Sons, Ltd.

Suggested Citation

  • Alexei Onatski & Noah Williams, 2010. "Empirical and policy performance of a forward-looking monetary model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 145-176.
  • Handle: RePEc:jae:japmet:v:25:y:2010:i:1:p:145-176
    DOI: 10.1002/jae.1131
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    References listed on IDEAS

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    Cited by:

    1. Juillard, M. & Le Bihan, H. & Millard, S., 2013. "Non-uniform wage-staggering: European evidence and monetary policy implications," Working papers 442, Banque de France.
    2. Eric Jondeau & Jean-Guillaume Sahuc, 2008. "Optimal Monetary Policy in an Estimated DSGE Model of the Euro Area with Cross-Country Heterogeneity," International Journal of Central Banking, International Journal of Central Banking, vol. 4(2), pages 23-72, June.
    3. Patrick Minford & Zhirong Ou & Michael Wickens, 2015. "Revisiting the Great Moderation: Policy or Luck?," Open Economies Review, Springer, vol. 26(2), pages 197-223, April.
    4. John B. Taylor & Volker Wieland, 2012. "Surprising Comparative Properties of Monetary Models: Results from a New Model Database," The Review of Economics and Statistics, MIT Press, vol. 94(3), pages 800-816, August.
    5. Costantini, Mauro & Gunter, Ulrich & Kunst, Robert M., 2012. "Forecast Combination Based on Multiple Encompassing Tests in a Macroeconomic DSGE-VAR System," Economics Series 292, Institute for Advanced Studies.
    6. Christoffel, Kai & Kuester, Keith & Linzert, Tobias, 2009. "The role of labor markets for euro area monetary policy," European Economic Review, Elsevier, vol. 53(8), pages 908-936, November.
    7. Daniel O. Beltran & David Draper, 2018. "Estimating dynamic macroeconomic models: how informative are the data?," Journal of the Royal Statistical Society Series C, Royal Statistical Society, vol. 67(2), pages 501-520, February.
    8. Kolasa, Marcin, 2009. "Structural heterogeneity or asymmetric shocks? Poland and the euro area through the lens of a two-country DSGE model," Economic Modelling, Elsevier, vol. 26(6), pages 1245-1269, November.
    9. Ben Ali, Samir, 2010. "A New Keynesian Phillips curve for Tunisia : Estimation and analysis of sensitivity," MPRA Paper 29624, University Library of Munich, Germany.
    10. Mauro Costantini & Ulrich Gunter & Robert M. Kunst, 2017. "Forecast Combinations in a DSGE‐VAR Lab," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 36(3), pages 305-324, April.
    11. Marc P. Giannoni & Jean Boivin, 2005. "DSGE Models in a Data-Rich Environment," Computing in Economics and Finance 2005 431, Society for Computational Economics.
    12. Jensen, Henrik & Ravn, Søren Hove & Santoro, Emiliano, 2019. "Kinks and Gains from Credit Cycles," CEPR Discussion Papers 13795, C.E.P.R. Discussion Papers.
    13. Iiboshi, Hirokuni & Matsumae, Tatsuyoshi & Namba, Ryoichi & Nishiyama, Shin-Ichi, 2015. "Estimating a DSGE model for Japan in a data-rich environment," Journal of the Japanese and International Economies, Elsevier, vol. 36(C), pages 25-55.
    14. Magda Kandil, 2010. "Demand shocks and the cyclical behavior of the real wage: Some international evidence," Journal of Applied Economics, Universidad del CEMA, vol. 13, pages 135-158, May.
    15. Carla Soares, 2008. "Impact on Welfare of Country Heterogeneity in a Currency Union," Working Papers w200814, Banco de Portugal, Economics and Research Department.
    16. Daichi Shirai, 2014. "A note on hump-shaped output in the RBC model," CIGS Working Paper Series 14-009E, The Canon Institute for Global Studies.

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