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Endogenous Persistence in an Estimated DSGE Model under Imperfect Information

  • Paul Levine

    (University of Surrey)

  • Joseph Pearlman

    (London Metropolitan University)

  • George Perendia

    (London Metropolitan University)

  • Bo Yang

    (University of Surrey)

We provide a tool for estimating DSGE models by BayesianMaximum-likelihood methods under very general information assumptions. This framework is applied to a New Keynesian model where we compare the standard approach, that assumes an informational asymmetry between private agents and the econometrician, with an assumption of informational symmetry. For the former, private agents observe all state variables including shocks, whereas the econometrician uses only data for output, inflation and interest rates. For the latter both agents have the same imperfect information set and this corresponds to what we term the 'informational consistency principle'. We first assume rational expectations and then generalize the model to allow some households and firms to form expectations adaptively. We find that in terms of model posterior probabilities, impulse responses, second moments and autocorrelations, the assumption of informational symmetry by rational agents significantly improves the model fit. We also find qualified empirical support for the heterogenous expectations model. JEL Classification: C11, C52, E12, E32.

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Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 0310.

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Length: 43 pages
Date of creation: Apr 2010
Date of revision:
Handle: RePEc:sur:surrec:0310
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  1. Paul Levine & Joseph Pearlman & George Perendia & Bo Yang, 2010. "Endogenous Persistence in an Estimated DSGE Model under Imperfect Information," School of Economics Discussion Papers 0310, School of Economics, University of Surrey.
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  20. Fabio Milani, 2005. "Expectations, Learning and Macroeconomic Persistence," Working Papers 050608, University of California-Irvine, Department of Economics.
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  23. M. Ali Choudhary & Paul Levine & Peter McAdam & Peter Welz, 2012. "The happiness puzzle: analytical aspects of the Easterlin paradox," Oxford Economic Papers, Oxford University Press, vol. 64(1), pages 27-42, January.
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