Article

A method for taking models to the data

National Bureau of Economic Research, Cambridge, MA 02138, USA
Journal of Economic Dynamics and Control (Impact Factor: 0.86). 02/2004; 28(6):1205-1226. DOI: 10.1016/S0165-1889(03)00080-0
Source: RePEc

ABSTRACT This paper develops a method for combining the power of a dynamic, stochastic, general equilibrium model with the flexibility of a vector autoregressive time-series model to obtain a hybrid that can be taken directly to the data. It estimates this hybrid model via maximum likelihood and uses the results to address a number of issues concerning the ability of a prototypical real business cycle model to explain movements in aggregate output and employment in the postwar US economy, the stability of the real business cycle model's structural parameters, and the performance of the hybrid model's out-of-sample forecasts.

0 Bookmarks
 · 
124 Views
  • [Show abstract] [Hide abstract]
    ABSTRACT: This paper investigates the transmission of financial shocks across large economies. To quantify these effects, we estimate a two-region open economy DSGE model that includes frictions in credit markets. The baseline model fails to replicate the high correlation between the U.S. and Euro Area macroeconomic variables. Allowing for an ad hoc, cross-regional correlation in financial shocks considerably improves the model’s ability to match the data. We extend the baseline model by including global banks, and generate an endogenous cross-regional correlation of borrowing costs. Simulations demonstrate large spillover effects, and highlight the importance of including frictions in international financial contracts for more accurately capturing the high cross-regional correlation.
    Journal of International Money and Finance 10/2014; · 1.02 Impact Factor
  • Source
  • [Show abstract] [Hide abstract]
    ABSTRACT: While the long run relation between money and inflation is well established, empirical evidence on the adjustment to the long run equilibrium is very heterogeneous. In this paper we use a multivari-ate state space framework that substantially expands the traditional vector error correction approach. This approach allows us to analyze the short run impact of money on prices in the United States between 1960Q1 and 2005Q4 by disentangling velocity and output from their persistent components. Next, we present an impulse response anal-ysis where we use sign restrictions to identify the structural shocks. Finally, we account for the possibility that measurement error exhib-ited by simple-sum monetary aggregates causes the consequences of monetary shocks to be improperly identified. Our findings suggest that when money is measured using a reputable index number, the quantity theory holds for the United States.
    Macroeconomic Dynamics 01/2014; FirstView:1-21. · 0.91 Impact Factor

Preview

Download
0 Downloads
Available from