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From Micro to Macro: A New Methodology to Discriminate Among Models

Author

Listed:
  • Gee Hee Hong

    (International Monetary Fund)

  • Ernesto Pasten

    (Banco Central de Chile)

  • Matthew Klepacz

    (College of William and Mary)

  • Raphael Schoenle

    (Brandeis University)

Abstract

We propose a new methodology to discriminate among models that uses both micro and macro moments to discipline model choice. The key insight lies in using macro moments conditional on micro moments to discipline the response of the main variable of interest following a key policy shock. Some of the micro moments may be sufficient statistics. In an application to discriminate among leading price-setting models, Calvo and menu cost, we show that both Calvo and menu cost models match key micro price moments. However, only Calvo replicates the irrelevance of kurtosis for monetary non-neutrality following a monetary policy shock. Our menu cost model can match the irrelevance of kurtosis, but at the cost of missing key micro price moments.

Suggested Citation

  • Gee Hee Hong & Ernesto Pasten & Matthew Klepacz & Raphael Schoenle, 2019. "From Micro to Macro: A New Methodology to Discriminate Among Models," 2019 Meeting Papers 906, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:906
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    References listed on IDEAS

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