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The Implementation of Scenarios using DSGE Models

Author

Listed:
  • Igor Vetlov

    (Bank of Lithuania)

  • Ricardo Mourinho Felix
  • Laure Frey
  • Tibor Hledik
  • Zoltan Jakab
  • Niki Papadopoulou

    (Central Bank of Cyprus)

  • Lukas Reiss
  • Martin Schneider

Abstract

The new generation of dynamic stochastic general equilibrium (DSGE) models seems particularly suited for conducting scenario analysis. These models formalise the behaviour of economic agents on the basis of explicit micro-foundations. As a result, they appear less prone to the Lucas critique than traditional macroeconometric models. DSGE models provide researchers with powerful tools, which allow for the design of a broad range of scenarios and can tackle a large range of issues, while at the same time offering an appealing structural interpretation of the scenario specification and simulation results. This paper provides illustrations of some of the modelling issues that often arise when implementing scenarios using DSGE models in the context of projection exercises or policy analysis. These issues reflect the sensitivity of DSGE model-based analysis to scenario assumptions, which in more traditional models are apparently less critical, such as, for example, scenario event anticipation and duration, as well as treatment of monetary and fiscal policy rules.

Suggested Citation

  • Igor Vetlov & Ricardo Mourinho Felix & Laure Frey & Tibor Hledik & Zoltan Jakab & Niki Papadopoulou & Lukas Reiss & Martin Schneider, 2010. "The Implementation of Scenarios using DSGE Models," Working Papers 2010-10, Central Bank of Cyprus.
  • Handle: RePEc:cyb:wpaper:2010-10
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    References listed on IDEAS

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    Cited by:

    1. Daragh Clancy & Rossana Merola, 2016. "ÉIRE Mod: A DSGE Model for Ireland," The Economic and Social Review, Economic and Social Studies, vol. 47(1), pages 1-31.

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    More about this item

    Keywords

    Business fluctuations; monetary policy; fiscal policy; forecasting and simulation;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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