Article

An estimated dynamic stochastic general equilibrium model for Estonia

Bank of Estonia, Bank of Estonia Working Papers 01/2009;
Source: RePEc

ABSTRACT This paper presents an estimated open economy dynamic stochastic general equilibrium model for Estonia. The model is designed to highlight the main driving forces behind the Estonian business cycle and to understand how euro area economic shocks and its monetary policy affect the small open economy of Estonia. The model described in this paper is a two-area DSGE model incorporating New Keynesian features such as nominal price and wage rigidity, variable capital utilization, investment adjustment costs, as well as other typical features - both for the domestic and euro area part of the model. It is rich in structural shocks such as technology, consumption preference, mark-up, etc. The model is estimated by Bayesian techniques using a quarterly data sample that covers main macroeconomic aggregates of Estonia and the euro area. The ultimate goal of the new model is for it to be used in simulation exercises, policy advice and forecasting at the Bank of Estonia

0 Bookmarks
 · 
190 Views
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: We develop and estimate a structural model of inflation that allows for a fraction of firms that use a backward-looking rule to set prices. The model nests the purely forward-looking New Keynesian Phillips curve as a particular case. We use measures of marginal cost as the relevant determinant of inflation, as the theory suggests, instead of an ad hoc output gap. Real marginal costs are a significant and quantitatively important determinant of inflation. Backward-looking price setting, while statistically significant, is not quantitatively important. Thus, we conclude that the New Keynesian Phillips curve provides a good first approximation to the dynamics of inflation.
    Journal of Monetary Economics. 09/1998;
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: This paper adopts Keynes' view that shocks to the marginal efficiency of i nvestment are important for business fluctuations, but incorporates i t in a neoclassical framework with endogenous capacity utilization. I ncreases in the efficiency of newly produced investment goods stimula te the formation of "new" capital and more intensive utilization and accelerated depreciation of "old" capital. Theoretical and quantitat ive analysis suggests that the shocks and transmission mechanism stud ied here may be important elements of business cycles. Copyright 1988 by American Economic Association.
    American Economic Review 02/1988; 78(3):402-17. · 2.69 Impact Factor
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: Macroeconomists have largely converged on method, model design, reduced-form shocks, and principles of policy advice. Our main disagreements today are about implementing the methodology. Some think New Keynesian models are ready to be used for quarter-to-quarter quantitative policy advice. We do not. Focusing on the state-of- the-art version of these models, we argue that some of its shocks and other features are not structural or consistent with microeconomic evidence. Since an accurate structural model is essential to reliably evaluate the effects of policies, we conclude that New Keynesian models are not yet useful for policy analysis. (JEL E12, E60)
    American Economic Journal Macroeconomics 01/2009; 1(1):242-66.

Full-text

View
2 Downloads
Available from