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A narrative approach to a fiscal DSGE model

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Abstract

This version: March 28, 2016 First version: February 2014 {{p}} Structural DSGE models are used both for analyzing policy and the sources of business cycles. Conclusions based on full structural models are, however, potentially affected by misspecification. A competing method is to use partially identified VARs based on narrative shocks. This paper asks whether both approaches agree. First, I show that, theoretically, the narrative VAR approach is valid in a class of DSGE models with Taylor-type policy rules. Second, I quantify whether the two approaches also agree empirically, that is, whether DSGE model restrictions on the VARs and the narrative variables are supported by the data. To that end, I first adapt the existing methods for shock identification with external instruments for Bayesian VARs in the SUR framework. I also extend the DSGE-VAR framework to incorporate these instruments. Based on a standard DSGE model with fiscal rules, my results indicate that the DSGE model identification is at odds with the narrative information as measured by the marginal likelihood. I trace this discrepancy to differences both in impulse responses and identified historical shocks.

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  • Thorsten Drautzburg, 2016. "A narrative approach to a fiscal DSGE model," Working Papers 16-11, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:16-11
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    10. Michael Roos & Matthias Reccius, 2021. "Narratives in economics," Papers 2109.02331, arXiv.org, revised Dec 2022.
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    14. Martin Bruns, 2019. "Proxy VAR Models in a Data-Rich Environment," Discussion Papers of DIW Berlin 1831, DIW Berlin, German Institute for Economic Research.
    15. Juan Antolin-Diaz & Juan F. Rubio-Ramirez, 2016. "Narrative Sign Restrictions for SVARs," FRB Atlanta Working Paper 2016-16, Federal Reserve Bank of Atlanta.
    16. Nikolaos Kokonas & Paulo Santos Monteiro, 2020. "The Ins and Outs of Unemployment in General Equilibrium," Discussion Papers 2014, Centre for Macroeconomics (CFM).
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    More about this item

    Keywords

    Fiscal policy; Monetary policy; DSGE model; Bayesian estimation; Narrative shocks; Bayesian VARs;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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

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