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Misspecification and Expectations Correction in New Keynesian DSGE Models

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  • Giovanni Angelini

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  • Luca Fanelli Fanelli

    ()

Abstract

This paper focuses on the dynamic misspecification that characterizes the class of small-scale New-Keynesian models and provides a `natural' remedy for the typical difficulties these models have in accounting for the rich contemporaneous and dynamic correlation structure of the data, generally faced with ad hoc shock specifications. We suggest using the `best fitting' statistical model for the data as a device through which it is possible to adapt the econometric specification of the New-Keynesian model. The statistical model may feature an autocorrelation structure that is more involved than the autocorrelation structure implied by the structural model's reduced form solution under rational expectations, and it is treated as the actual agents' expectations generating mechanism. A pseudo-structural form is built from the baseline system of Euler equations by forcing the state vector of the system to have the same dimension as the state vector characterizing the statistical model. We provide an empirical illustration based on U.S. quarterly data and a small-scale monetary New Keynesian model.

Suggested Citation

  • Giovanni Angelini & Luca Fanelli Fanelli, 2015. "Misspecification and Expectations Correction in New Keynesian DSGE Models," Quaderni di Dipartimento 1, Department of Statistics, University of Bologna.
  • Handle: RePEc:bot:quadip:wpaper:125
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    Cited by:

    1. Paccagnini, Alessia, 2017. "Dealing with Misspecification in DSGE Models: A Survey," MPRA Paper 82914, University Library of Munich, Germany.

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    Keywords

    Dynamic stochastic general equilibrium model; Expectations; Kalman filter; New Keynesian models; State space model.;

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