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Assessing the fit of small open economy DSGEs

We describe a simple extension of the Monacelli (2005) small open economy model that incorporates a non-tradable good, habit persistence and price indexation. The empirical fit of eight different specifications of this model is then tested in a Bayesian framework using data for three small open economies: Australia, Canada, and New Zealand. The results show that the model with a non-tradable good fits the data better than the one-good model across all specifications considered. In contrast to Rabanal and Rubio-Ramarez (2005), we find that adding price indexation to either the one- or two-good model deteriorates overall empirical fit.

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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2006/11.

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Length: 36 p.
Date of creation: Dec 2006
Date of revision:
Handle: RePEc:nzb:nzbdps:2006/11
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  1. Matheson, Troy D., 2008. "Phillips curve forecasting in a small open economy," Economics Letters, Elsevier, vol. 98(2), pages 161-166, February.
  2. Sungbae An & Frank Schorfheide, 2006. "Bayesian analysis of DSGE models," Working Papers 06-5, Federal Reserve Bank of Philadelphia.
  3. Jesús Fernández-Villaverde & Juan Francisco Rubio-Ramírez & Thomas J. Sargent, 2005. "A, B, C’s, (and D’s) for understanding VARs," FRB Atlanta Working Paper 2005-09, Federal Reserve Bank of Atlanta.
  4. Michael B. Devereux & Philip R. Lane & Juanyi Xu, 2006. "Exchange Rates and Monetary Policy in Emerging Market Economies," Economic Journal, Royal Economic Society, vol. 116(511), pages 478-506, 04.
  5. Engel, C., 1996. "Accounting for U.S. Real Exchange Rate Changes," Discussion Papers in Economics at the University of Washington 96-02, Department of Economics at the University of Washington.
  6. Laxton, Douglas & Pesenti, Paolo, 2003. "Monetary rules for small, open, emerging economies," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1109-1146, July.
  7. repec:oup:restud:v:72:y:2005:i:3:p:707-734 is not listed on IDEAS
  8. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  9. De Gregorio, Jose & Giovannini, Alberto & Wolf, Holger C., 1994. "International evidence on tradables and nontradables inflation," European Economic Review, Elsevier, vol. 38(6), pages 1225-1244, June.
  10. Holger C. Wolf & Alberto Giovannini & Jose De Gregorio, 1994. "International Evidenceon Tradables and Nontradables Inflation," IMF Working Papers 94/33, International Monetary Fund.
  11. Galí, Jordi & Monacelli, Tommaso, 2002. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," CEPR Discussion Papers 3346, C.E.P.R. Discussion Papers.
  12. Philip Liu, 2006. "A Small New Keynesian Model of the New Zealand economy," Reserve Bank of New Zealand Discussion Paper Series DP2006/03, Reserve Bank of New Zealand.
  13. Marco Del Negro & Frank Schorfheide, 2002. "Priors from general equilibrium models for VARs," FRB Atlanta Working Paper 2002-14, Federal Reserve Bank of Atlanta.
  14. John Geweke, 1999. "Using Simulation Methods for Bayesian Econometric Models," Computing in Economics and Finance 1999 832, Society for Computational Economics.
  15. Santacreu, Ana Maria, 2005. "Reaction functions in a small open economy: What role for non-traded inflation?," Working Papers 2014-44, Federal Reserve Bank of St. Louis.
  16. Ariel Burstein & Martin Eichenbaum & Sergio Rebelo, 2005. "The Importance of Nontradable Goods' Prices in Cyclical Real Exchange Rate Fluctuations," RCER Working Papers 523, University of Rochester - Center for Economic Research (RCER).
  17. Marco Del Negro & Frank Schorfheide & Frank Smets & Raf Wouters, 2004. "On the fit and forecasting performance of New Keynesian models," FRB Atlanta Working Paper 2004-37, Federal Reserve Bank of Atlanta.
  18. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
  19. Rabanal, Pau & Rubio-Ramirez, Juan F., 2005. "Comparing New Keynesian models of the business cycle: A Bayesian approach," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1151-1166, September.
  20. Stephen Murchison & Andrew Rennison, 2006. "ToTEM: The Bank of Canada's New Quarterly Projection Model," Technical Reports 97, Bank of Canada.
  21. Smets, Frank & Wouters, Raf, 2002. "An estimated stochastic dynamic general equilibrium model of the euro area," Working Paper Series 0171, European Central Bank.
  22. Frank Schorfheide, 2000. "Loss function-based evaluation of DSGE models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 645-670.
  23. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models—Rejoinder," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 211-219.
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