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The Implementation of Scenarios Using DSGE Models

Listed author(s):
  • Igor Vetlov

    ()

    (Bank of Lithuania)

  • Ricardo Mourinho Félix

    ()

    (Banco de Portugal)

  • Laure Frey

    ()

    (Banque de France)

  • Tibor Hlédik

    ()

    (Czech National Bank)

  • Zoltán Jakab

    ()

    (Office of the Fiscal Council, Republic of Hungary)

  • Niki Papadopoulou

    ()

    (Central Bank of Cyprus)

  • Lukas Reiss

    ()

    (Oesterreichische Nationalbank)

  • Martin Schneider

    ()

    (Oesterreichische Nationalbank)

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 more traditional macroeconometric models. DSGE models provide researchers with powerful tools, which allow for the designing of a broad range of scenarios and tackling a large range of issues, offering at the same time an appealing structural interpretation of the scenario specification and simulation results. The paper provides illustrations on 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, treatment of monetary and fiscal policy rules.

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File URL: http://www.lb.lt/en/publications/no-8-the-implementation-of-scenarios-using-dsge-models
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Paper provided by Bank of Lithuania in its series Bank of Lithuania Working Paper Series with number 8.

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Length: 49 pages
Date of creation: 25 Aug 2010
Handle: RePEc:lie:wpaper:8
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