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Global sensitivity analysis for macro-economic models

Listed author(s):
  • Marco Ratto

    (European commission, Joint Research Centre)

DSGE models are customarily built in the presence of uncertainties of various levels, such as the specification of behavioural equations of economic agents, the actual values of model parameters, and so on. When the degree of complexity of the model structure and its parameterization increases, it becomes not trivial if not impossible to know a priory the set of model coefficients assuring the stability of a model, or the mapping between structural parameters and the reduced form of a rational expectations model. Global sensitivity analysis techniques can be very useful in this context, helping to make the model structure and properties more transparent to the analyst. In this paper we will discuss two classes of methods: Monte Carlo Filtering techniques and functional/variance decomposition techniques. Monte Carlo filtering (MCF) techniques can be used to map the stability region of DSGE models and to detect parameters that mostly drive the violation of the rank condition. Such procedure is extremely useful for detecting critical regions in the model parameter space of DSGE models. In addition to stability, MCF techniques are also useful to map the fit of each singular series in complex multivariate systems, to answer the following types of questions: which parameters mostly drive the fit of GDP and which the fit of inflation? Is there any trade-off? The second class of sensitivity techniques is based on the so-called High-Dimensional Model Representation. Such a functional decomposition can be very effective in giving a non-parametric representation of the input-output mapping. For example, this approach can be used to map the relationship between structural parameters and the reduced form of rational expectation models. Applications to small DSGE models will complement the description of the methodologies.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 42.

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Date of creation: 04 Jul 2006
Handle: RePEc:sce:scecfa:42
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  1. Lubik, Thomas A. & Schorfheide, Frank, 2007. "Do central banks respond to exchange rate movements? A structural investigation," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1069-1087, May.
  2. Frank Schorfheide, 2000. "Loss function-based evaluation of DSGE models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 645-670.
  3. Kuttner, Kenneth N, 1994. "Estimating Potential Output as a Latent Variable," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 361-368, July.
  4. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09.
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