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Natural rate measures in an estimated DSGE model of the U.S. economy

  • Rochelle M. Edge
  • Michael T. Kiley
  • Jean-Philippe Laforte

This paper presents a monetary DSGE model of the U.S. economy. The model captures the most important production, expenditure, and nominal-contracting decisions underlying economic data while remaining sufficiently small to allow it to provide a clear interpretation of the data. We emphasize the role of model-based analyses as vehicles for storytelling by providing several examples--based around the evolution of natural rates of production and interest--of how our model can provide narratives to explain recent macroeconomic fluctuations. The stories obtained from our model are both similar to and quite different from conventional accounts.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2007-08.

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Date of creation: 2007
Handle: RePEc:fip:fedgfe:2007-08
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  1. Thomas Laubach and John C. Williams, 2001. "Measuring the Natural Rate of Interest," Computing in Economics and Finance 2001 35, Society for Computational Economics.
  2. Lawrence J. Christiano & Michele Boldrin & Jonas D. M. Fisher, 2001. "Habit Persistence, Asset Returns, and the Business Cycle," American Economic Review, American Economic Association, vol. 91(1), pages 149-166, March.
  3. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland.
  4. Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers 95-15, C.V. Starr Center for Applied Economics, New York University.
  5. John M. Abowd & David Card, 1986. "On the Covariance Structure of Earnings and Hours Changes," NBER Working Papers 1832, National Bureau of Economic Research, Inc.
  6. Michael Kiley, 2005. "A Quantitative Comparison Of Sticky-Price And Sticky-Information Models Of Price Setting," Computing in Economics and Finance 2005 183, Society for Computational Economics.
  7. Michael T. Kiley, 2007. "Habit persistence, non-separability between consumption and leisure, or rule-of thumb consumers: which accounts for the predictability of consumption growth?," Finance and Economics Discussion Series 2007-48, Board of Governors of the Federal Reserve System (U.S.).
  8. Robert E. Hall, 2005. "Separating the business cycle from other economic fluctuations," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 133-179.
  9. Rochelle M. Edge & Michael T. Kiley & Jean-Philippe Laforte, 2010. "A comparison of forecast performance between Federal Reserve staff forecasts, simple reduced-form models, and a DSGE model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(4), pages 720-754.
  10. Jeremy Rudd & Karl Whelan, 2005. "Does labor's share drive inflation?," Open Access publications 10197/243, School of Economics, University College Dublin.
  11. Katharine S. Neiss & Edward Nelson, 2001. "The real interest rate gap as an inflation indicator," Bank of England working papers 130, Bank of England.
  12. Jean-Philippe Laforte, 2005. "Pricing models: a Bayesian DSGE approach to the U.S. economy," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  13. Greenwood, J. & Hercowitz, Z. & Krusell, P., 1995. "Long-Run Implications of Investment-Specific Technological Change," UWO Department of Economics Working Papers 9510, University of Western Ontario, Department of Economics.
  14. Raf Wouters & Frank Smets, 2005. "Comparing shocks and frictions in US and euro area business cycles: a Bayesian DSGE Approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(2), pages 161-183.
  15. Riccardo DiCecio, 2004. "Comovement: it's not a puzzle," 2004 Meeting Papers 113, Society for Economic Dynamics.
  16. Reifschneider, David L. & Stockton, David J. & Wilcox, David W., 1997. "Econometric models and the monetary policy process," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 47(1), pages 1-37, December.
  17. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 2000. "The role of investment-specific technological change in the business cycle," European Economic Review, Elsevier, vol. 44(1), pages 91-115, January.
  18. Karen E. Dynan, 2000. "Habit Formation in Consumer Preferences: Evidence from Panel Data," American Economic Review, American Economic Association, vol. 90(3), pages 391-406, June.
  19. Erceg, Christopher & Guerriei, Luca & Gust, Christopher, 2006. "SIGMA: A New Open Economy Model for Policy Analysis," MPRA Paper 813, University Library of Munich, Germany.
  20. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  21. Whelan, Karl, 2003. " A Two-Sector Approach to Modeling U.S. NIPA Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 627-56, August.
  22. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
  23. Charles R. Bean, 2005. "Commentary : separating the business cycle from other economic fluctuations," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 181-186.
  24. Jonas D. M. Fisher, 2006. "The Dynamic Effects of Neutral and Investment-Specific Technology Shocks," Journal of Political Economy, University of Chicago Press, vol. 114(3), pages 413-451, June.
  25. Rochelle M. Edge & Thomas Laubach & John C. Williams, 2003. "The responses of wages and prices to technology shocks," Finance and Economics Discussion Series 2003-65, Board of Governors of the Federal Reserve System (U.S.).
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