The Experts below are selected from a list of 16350 Experts worldwide ranked by ideXlab platform
Grzegorz Koloch - One of the best experts on this subject based on the ideXlab platform.
-
skew normal shocks in the linear state space form DSGE Model
Social Science Research Network, 2011Co-Authors: Grzegorz Grabek, Bohdan Klos, Grzegorz KolochAbstract:Observed macroeconomic data – notably GDP growth rate, inflation and interest rates – can be, and usually are skewed. Economists attempt to fit Models to data by matching first and second moments or co-moments, but skewness is usually neglected. It is so probably because skewness cannot appear in linear (or linearized) Models with Gaussian shocks, and shocks are usually assumed to be Gaussian. Skewness requires non-linearities or non-Gaussian shocks. In this paper we introduce skewness into the DSGE framework assuming skewed normal distribution for shocks while keeping the Model linear (or linearized). We argue that such a skewness can be perceived as structural, since it concerns the nature of structural shocks. Importantly, the skewed normal distribution nests the normal one, so that skewness is not assumed, but only allowed for. We derive elementary facts about skewness propagation in the state space Model and, using the well-known Lubik-Schorfheide Model, we run simulations to investigate how skewness propagates from shocks to observables in a standard DSGE Model. We also assess properties of an ad hoc two-steps estimator of Models’ parameters, shocks’ skewness parameters among them.
-
skew normal shocks in the linear state space form DSGE Model
Research Papers in Economics, 2011Co-Authors: Grzegorz Grabek, Grzegorz KolochAbstract:Observed macroeconomic data ‐ notably GDP, inflation and interest rates ‐ can be, and usually are skewed. Economists attempt to fit Models to data by matching first and second moments or co-moments, but skewness is usually neglected. It is so probably because skewness cannot appear in linear (or linearized) Models with Gaussian shocks, and shocks are usually assumed to be Gaussian. Skewness requires non-linearities or nonGaussian shocks. In this paper we introduce skewness into the DSGE framework assuming skewed normal distribution for shocks while keeping the Model linear (or linearized). We argue that such a skewness can be perceived as structural, since it concerns the nature of structural shocks. Importantly, the skewed normal distribution nests the normal one, so that skewness is not assumed, but only allowed for. We derive elementary facts about skewness propagation in the state space Model and, using the well-known Lubik-Schorfheide Model, we run simulations to investigate how skewness propagates from shocks to observables in a standard DSGE Model. We also assess properties of an ad hoc quasi-maximum likelihood estimator of Models’ parameters, shocks’ skewness parameters among them.
Frank Schorfheide - One of the best experts on this subject based on the ideXlab platform.
-
assessing DSGE Model nonlinearities
Journal of Economic Dynamics and Control, 2013Co-Authors: Boragan S Aruoba, Luigi Bocola, Frank SchorfheideAbstract:Abstract We develop a new class of time series Models to identify nonlinearities in the data and to evaluate DSGE Models. U.S. output growth and the federal funds rate display nonlinear conditional mean dynamics, while inflation and nominal wage growth feature conditional heteroskedasticity. We estimate a DSGE Model with asymmetric wage and price adjustment costs and use predictive checks to assess its ability to account for these nonlinearities. While it is able to match the nonlinear inflation and wage dynamics, thanks to the estimated downward wage and price rigidities, these do not spill over to output growth or the interest rate.
-
evaluating DSGE Model forecasts of comovements
Journal of Econometrics, 2012Co-Authors: Edward P Herbst, Frank SchorfheideAbstract:Abstract This paper develops and applies tools to assess multivariate aspects of Bayesian Dynamic Stochastic General Equilibrium (DSGE) Model forecasts and their ability to predict comovements among key macroeconomic variables. We construct posterior predictive checks to evaluate conditional and unconditional density forecasts, in addition to checks for root-mean-squared errors and event probabilities associated with these forecasts. The checks are implemented on a three-equation DSGE Model as well as the Smets and Wouters (2007) Model using real-time data. We find that the additional features incorporated into the Smets–Wouters Model do not lead to a uniform improvement in the quality of density forecasts and prediction of comovements of output, inflation, and interest rates.
-
DSGE Model based forecasting
Staff Reports, 2012Co-Authors: Marco Del Negro, Frank SchorfheideAbstract:Dynamic stochastic general equilibrium (DSGE) Models use modern macroeconomic theory to explain and predict comovements of aggregate time series over the business cycle and to perform policy analysis. We explain how to use DSGE Models for all three purposes – forecasting, story-telling, and policy experiments – and review their forecasting record. We also provide our own real-time assessment of the forecasting performance of the Smets and Wouters (2007) Model data up to 2011, compare it with Blue Chip and Greenbook forecasts, and show how it changes as we augment the standard set of observables with external information from surveys (nowcasts, interest rates, and long-run inflation and output growth expectations). We explore methods of generating forecasts in the presence of a zero-lower-bound constraint on nominal interest rates and conditional on counterfactual interest rate paths. Finally, we perform a post-mortem of DSGE Model forecasts of the Great Recession, and show that forecasts from a version of the Smets–Wouters Model augmented by financial frictions and with interest rate spreads as an observable compare well with Blue Chip forecasts.
-
evaluating DSGE Model forecasts of comovements
Research Papers in Economics, 2011Co-Authors: Edward P Herbst, Frank SchorfheideAbstract:This paper develops and applies tools to assess multivariate aspects of Bayesian Dynamic Stochastic General Equilibrium (DSGE) Model forecasts and their ability to predict comovements among key macroeconomic variables. The authors construct posterior predictive checks to evaluate the calibration of conditional and unconditional density forecasts, in addition to checks for root-mean-squared errors and event probabilities associated with these forecasts. The checks are implemented on a three-equation DSGE Model as well as the Smets and Wouters (2007) Model using real-time data. They find that the additional features incorporated into the Smets-Wouters Model do not lead to a uniform improvement in the quality of density forecasts and prediction of comovements of output, inflation, and interest rates.
-
DSGE Model based estimation of the new keynesian phillips curve
Economic Quarterly - Federal Reserve Bank of Richmond, 2008Co-Authors: Frank SchorfheideAbstract:(ProQuest: ... denotes formulae omitted.) An important building block in modern dynamic stochastic general equilibrium (DSGE) Models is the price-setting equation for firms. In Models in which the adjustment of nominal prices is costly, this equation links inflation to current and future expected real marginal costs and is typically referred to as the New Keynesian Phillips curve (NKPC). Its most popular incarnation can be derived from the assumption that firms face quadratic nominal price adjustment costs (Rotemberg 1982) or that firms are unable to re-optimize their prices with a certain probability in each period (Calvo 1983). The Calvo Model has a particular appeal because it generates predictions about the frequency of price changes, which can be measured with microeconomic data (Bils and Klenow 2004, Klenow and Kryvtsov 2008). The slope of the NKPC is important for the propagation of shocks and determines the output-inflation tradeoff faced by policymakers. The Phillips curve relationship can also be used to forecast inflation. This article reviews estimates ofNKPCparameters that have been obtained by fitting fully specified DSGE Models to U.S. data. By now, numerous empirical papers estimate DSGE Models with essentially the same NKPC specification. In this literature, the Phillips curve implies that inflation can be expressed as the discounted sum of expected future marginal costs, where marginal costs equal the labor share. We document that the identification of the Phillips curve coefficients is tenuous and no consensus about its slope and the importance of lagged inflation has emerged from the empirical studies. We begin by examining how the NKPC parameters are identified in a DSGE Model-based estimation. This is a difficult question. Many estimates are based on a likelihood function, which is the Model-implied probability distribution of a set of observables indexed by a parameter vector. The likelihood function peaks at parameter values for which the Model-implied autovariance function of a vector of macroeconomic time series matches the sample autocovariance function. Unfortunately, this description is not particularly illuminating. More intuitively, the NKPC parameters are estimated by a regression of inflation on the sum of discounted future expected marginal costs. The likelihood function corrects the bias that arises from the endogeneity of the marginal cost regressor. We show that if one simply uses ordinary leastsquares (OLS) to regress inflation on measures of expected marginal costs, the slope coefficient is very close to zero. This finding is quite robust to the choice of detrending method and marginal cost measure. Hence, much of the variation in the estimates reported in the literature is due to the multitude of endogeneity corrections that arise by fitting different DSGE Models that embody essentially the same Phillips curve specification. The review of empirical studies distinguishes between papers in which marginal costs are included in the observations and, hence, are directly used in the estimation and studies that treat marginal costs as a latent variable. In the latter case, NKPC estimates are more sensitive to the specification of the households' behavior, the conduct of monetary policy, and the law of motion of the exogenous disturbances. Estimates of the slope of the Phillips curve lie between 0 and 4. If the list of observables spans the labor share, then the slope estimates fall into a much narrower range of 0.005 to 0.135. No consensus has emerged with respect to the importance of lagged inflation in the Phillips curve. We compare estimates of the relative movement of inflation and output in response to a monetary policy shock, which captures an important tradeoff for monetary policymakers. We find that the estimates in the studies that are surveyed in this article range from 0.07 to 1.4. Avalue of 0.07 (1.4) implies that a 1 percent increase in output due to a monetary policy shock is accompanied by a quarter-to-quarter inflation rate of 7 (140) basis points. …
Patrizio Tirelli - One of the best experts on this subject based on the ideXlab platform.
-
limited asset market participation and the euro area crisis an empirical DSGE Model
Social Science Research Network, 2018Co-Authors: Alice Albonico, Alessia Paccagnini, Patrizio TirelliAbstract:We estimate a medium scale DSGE Model for the Euro area with Limited Asset Market Participation (LAMP). Our results suggest that in the recent EMU years LAMP is particularly sizeable (393 during 1993-2012) and important to understand business cycle features. The Bayes factor and the forecasting performance show that the LAMP Model is preferred to its representative household counterpart. In the RA Model the risk premium shock is the main driver of output volatility in order to match consumption correlation with output. In the LAMP Model this role is played by the investment-specific shock, because Non-Ricardian households introduce a Keynesian multiplier effect and raise the correlation between consumption and investments. We also detect contractionary role of monetary policy shocks during the post-2007 years. In this period consumption of Non-Ricardian households fell dramatically, but this outcome might have been avoided by a more aggressive policy stance.
-
subprime mortgages and banking in a DSGE Model
Social Science Research Network, 2017Co-Authors: Martino Ricci, Patrizio TirelliAbstract:Can a DSGE Model replicate the financial crisis effects without assuming unprecedented and implausibly large shocks? Starting from the assumption that the subprime crisis triggered the financial crisis, we introduce balance-sheet effects for housing market borrowers and for commercial banks in an otherwise standard DSGE Model. Our crisis experiment is initiated by a shock to subprime lending risk, which is calibrated to match the observed increase in subprime delinquency rates. Due to contagion of prime borrowers and to the ensuing adverse effect on banks balance sheets, this apparently small shock is sufficient to trigger a decline in housing investment comparable to what was observed during the financial crisis. The adverse effect of sub-primers risk on commercial banks’ agency problem is a crucial driver of our results.
-
estimating a DSGE Model with limited asset market participation for the euro area
Social Science Research Network, 2014Co-Authors: Alice Albonico, Alessia Paccagnini, Patrizio TirelliAbstract:We estimate a medium scale DSGE Model for the Euro Area to gain intuition on the importance of Limited Asset Market Participation (LAMP). Our results suggest that LAMP is sizeable (39% of households over the 1993-2012 sample) and important to understand EMU business cycle, especially, in the light of the recent financial crisis. In comparison with the representative households counterpart, the LAMP Model is preferred on the grounds of both the Bayes factor and the average forecasting performance. Given the tighter credit standards we might expect in the near future, the high proportion of LAMP households is likely to remain an important feature of EMU. We also find that the LAMP Model leads to conclusions about the main determinants of EMU business cycle that are substantially different from those obtained under the representative agent hypothesis. Given these results, the LAMP hypothesis should be part and parcel of empirical DSGE Models of the Euro area.
-
estimating a DSGE Model with limited asset market participation for the euro area
Research Papers in Economics, 2014Co-Authors: Alice Albonico, Alessia Paccagnini, Patrizio TirelliAbstract:We estimate a medium scale DSGE Model for the Euro Area to gain intuition on the importance of Limited Asset Market Participation (LAMP). Our results suggest that LAMP is sizeable (39% of households over the 1993-2012 sample) and important to understand EMU business cycle, especially, in the light of the recent …nancial crisis. In comparison with the representative households counterpart, the LAMP Model is preferred on the grounds of both the Bayes factor and the average forecasting performance. Given the tighter credit standards we might expect in the near future, the high proportion of LAMP households is likely to remain an important feature of EMU. We also …nd that the LAMP Model leads to conclusions about the main determinants of EMU business cycle that are substantially
-
the equity premium in a DSGE Model with limited asset market participation
2014Co-Authors: Lorenzo Menna, Patrizio TirelliAbstract:Models based on the representative agent assumption cannot rationalize observed equity premia. In response to this, exchange economy Models have introduced agents heterogeneity, typically in the form of bond and equity holders. We reconsider the issue introducing Limited Asset Market Participation in an otherwise standard medium scale DSGE Model. Our Model fits financial and macroeconomic data well. We obtain that the correlation between asset holders consumption and financial returns strongly increases in the share of agents excluded from financial markets participation, The predicted unconditional equity premium is therefore large. Further, the strong correlation between dividends and Ricardian households' consumption unambiguously increases precautionary savings and reduces the riskless rate.
Denny Lie - One of the best experts on this subject based on the ideXlab platform.
-
implications of state dependent pricing for DSGE Model based policy analysis in indonesia
Economic Analysis and Policy, 2021Co-Authors: Denny LieAbstract:Abstract This paper builds a small open economy dynamic stochastic general equilibrium (DSGE) Model for Indonesia with state-dependent pricing (SDP) and studies its implications for policy analysis. Variations in the extensive margin of price adjustment under SDP are shown to non-trivially affect the Model-generated variance decompositions and impulse responses to various shocks. DSGE Model-based policy analyses conducted without this extensive margin feature might therefore lead to inaccurate policy prescriptions. In particular, the SDP Model would call for a greater degree of monetary easing in response to the COVID-19 pandemic, than that prescribed by the standard time-dependent pricing (TDP) Model.
-
implications of state dependent pricing for DSGE Model based policy analysis in indonesia
Social Science Research Network, 2020Co-Authors: Denny LieAbstract:This paper studies the implications of state-dependent pricing in a small open-economy dynamic stochastic general equilibrium (DSGE) Model for Indonesia. I show that variations in the timing and frequency of price adjustment inherent in a state-dependent pricing assumption could have important implications for DSGE Model-based policy analysis in Indonesia. This extensive margin effect produces disparities in the conditional variance decompositions and the impulse responses to various shocks responsible for business cycle fluctuations. An investigation into the impact of COVID-19 pandemic shocks indicates that such variations non-trivially affect the analysis on the appropriate degree of monetary policy response to the shocks. A state-dependent pricing Model would call for a greater degree of monetary easing in response to the COVID-19 pandemic, than that prescribed by a traditional time-dependent pricing Model. The broader implication is clear. For Modelling and analyzing the Indonesian economy, in which the inflation rates have historically been moderate-to-high and highly variable, state-dependent pricing is an essential Model feature.
-
observed inflation target adjustments in an estimated DSGE Model for indonesia do they matter for aggregate fluctuations
Social Science Research Network, 2018Co-Authors: Denny LieAbstract:This paper investigates the role of observed official inflation-target adjustments in aggregate macroeconomic fluctuations in Indonesia, using an estimated Dynamic Stochastic General Equilibrium (DSGE) Model. The paper finds that these adjustments or shocks play a non-trivial role in the fluctuations of inflation and nominal interest rate in Indonesia. Output fluctuations, however, are virtually unaffected. A counterfactual exercise shows that a gradual reduction in Bank Indonesia's inflation target may have not been optimal. The paper also provides additional insights on the contribution of various shocks in driving aggregate fluctuations in Indonesia. Technology and monetary-policy shocks are found to be the main driving factor for both output and inflation fluctuations. Movements in the nominal interest rate are mostly driven by preference and risk-premium shocks, with inflation-target shocks playing a larger role in the longer run. The inclusion of inflation-target shocks in the Model is also shown to improve the Model's fit and out-of-sample predictive performance.
Alessia Paccagnini - One of the best experts on this subject based on the ideXlab platform.
-
limited asset market participation and the euro area crisis an empirical DSGE Model
Social Science Research Network, 2018Co-Authors: Alice Albonico, Alessia Paccagnini, Patrizio TirelliAbstract:We estimate a medium scale DSGE Model for the Euro area with Limited Asset Market Participation (LAMP). Our results suggest that in the recent EMU years LAMP is particularly sizeable (393 during 1993-2012) and important to understand business cycle features. The Bayes factor and the forecasting performance show that the LAMP Model is preferred to its representative household counterpart. In the RA Model the risk premium shock is the main driver of output volatility in order to match consumption correlation with output. In the LAMP Model this role is played by the investment-specific shock, because Non-Ricardian households introduce a Keynesian multiplier effect and raise the correlation between consumption and investments. We also detect contractionary role of monetary policy shocks during the post-2007 years. In this period consumption of Non-Ricardian households fell dramatically, but this outcome might have been avoided by a more aggressive policy stance.
-
dealing with financial instability under a DSGE Modeling approach with banking intermediation a predictability analysis versus tvp vars
Journal of Financial Stability, 2016Co-Authors: Stelios Bekiros, Alessia Paccagnini, Roberta Cardani, Stefania VillaAbstract:In the dynamic stochastic general equilibrium (DSGE) literature there has been an increasing awareness on the role that the banking sector can play in macroeconomic activity. We present a DSGE Model with financial intermediation as in Gertler and Karadi (2011). The estimation of shocks and of the structural parameters shows that time-variation should be crucial in any attempted empirical analysis. Since DSGE Modelling usually fails to take into account inherent nonlinearities of the economy, we propose a novel time-varying parameter (TVP) state-space estimation method for VAR processes both for homoskedastic and heteroskedastic error structures. We conduct an exhaustive empirical exercise to compare the out-of-sample predictive performance of the estimated DSGE Model with that of standard ARs, VARs, Bayesian VARs and TVP-VARs. We find that the TVP-VAR provides the best forecasting performance for the series of GDP and net worth of financial intermediaries for all steps-ahead, while the DSGE Model outperforms the other specifications in forecasting inflation and the federal funds rate at shorter horizons.
-
dealing with financial instability under a DSGE Modeling approach with banking intermediation a predictability analysis versus tvp vars
Research Papers in Economics, 2016Co-Authors: Stelios Bekiros, Alessia Paccagnini, Roberta Cardani, Stefania VillaAbstract:Recently there has been an increasing awareness on the role that the banking sector can play in macroeconomic activity, especially within the context of the DSGE literature. In this work, we present a DSGE Model with financial intermediation as in Gertler and Karadi (2011). The estimation of the shocks and of the structural parameters shows that time-variation can be crucial in the empirical analysis. As DSGE Modeling fails to take into account inherent nonlinearities of the economy, we introduce a novel time-varying coefficient state-space estimation method for VAR processes, for homoskedastic and heteroskedastic error structures (TVP-VAR). We conduct an extensive empirical exercise to compare the out-of-sample forecastability of the DSGE Model versus standard ARs, VARs, Bayesian VARs and TVP-VARs. We find that the TVP-VAR provides the best forecasting performance for the series of GDP and net worth of financial intermediaries for all steps-ahead, while the DSGE Model with the incorporation of a banking sector outperforms the other specifications in forecasting inflation and the federal funds rate at shorter horizons.
-
estimating a DSGE Model with limited asset market participation for the euro area
Social Science Research Network, 2014Co-Authors: Alice Albonico, Alessia Paccagnini, Patrizio TirelliAbstract:We estimate a medium scale DSGE Model for the Euro Area to gain intuition on the importance of Limited Asset Market Participation (LAMP). Our results suggest that LAMP is sizeable (39% of households over the 1993-2012 sample) and important to understand EMU business cycle, especially, in the light of the recent financial crisis. In comparison with the representative households counterpart, the LAMP Model is preferred on the grounds of both the Bayes factor and the average forecasting performance. Given the tighter credit standards we might expect in the near future, the high proportion of LAMP households is likely to remain an important feature of EMU. We also find that the LAMP Model leads to conclusions about the main determinants of EMU business cycle that are substantially different from those obtained under the representative agent hypothesis. Given these results, the LAMP hypothesis should be part and parcel of empirical DSGE Models of the Euro area.
-
estimating a DSGE Model with limited asset market participation for the euro area
Research Papers in Economics, 2014Co-Authors: Alice Albonico, Alessia Paccagnini, Patrizio TirelliAbstract:We estimate a medium scale DSGE Model for the Euro Area to gain intuition on the importance of Limited Asset Market Participation (LAMP). Our results suggest that LAMP is sizeable (39% of households over the 1993-2012 sample) and important to understand EMU business cycle, especially, in the light of the recent …nancial crisis. In comparison with the representative households counterpart, the LAMP Model is preferred on the grounds of both the Bayes factor and the average forecasting performance. Given the tighter credit standards we might expect in the near future, the high proportion of LAMP households is likely to remain an important feature of EMU. We also …nd that the LAMP Model leads to conclusions about the main determinants of EMU business cycle that are substantially
