Working Paper: CEPR ID: DP11461
Authors: Volker Wieland; Elena Afanasyeva; Meguy Kuete; Jinhyuk Yoo
Abstract: The global financial crisis and the ensuing criticism of macroeconomics have inspired researchers to explore new modeling approaches. There are many new models that deliver improved estimates of the transmission of macroeconomic policies and aim to better integrate the financial sector in business cycle analysis. Policy making institutions need to compare available models of policy transmission and evaluate the impact and interaction of policy instruments in order to design effective policy strategies. This paper reviews the literature on model comparison and presents a new approach for comparative analysis. Its computational implementation enables individual researchers to conduct systematic model comparisons and policy evaluations easily and at low cost. This approach also contributes to improving reproducibility of computational research in macroeconomic modeling. Several applications serve to illustrate the usefulness of model comparison and the new tools in the area of monetary and fiscal policy. They include an analysis of the impact of parameter shifts on the effects of fiscal policy, a comparison of monetary policy transmission across model generations and a cross-country comparison of the impact of changes in central bank rates in the United States and the euro area. Furthermore, the chapter includes a large-scale comparison of the dynamics and policy implications of different macro-financial models. The models considered account for financial accelerator effects in investment financing, credit and house price booms and a role for bank capital. A final exercise illustrates how these models can be used toassess the benefits of leaning against credit growth in monetary policy.
Keywords: Macroeconomic Models; Model Comparison; Policy Robustness; Macrofinance; Monetary Policy
JEL Codes: C3; C5; E1; E5; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Integration of the financial sector into macroeconomic models (E44) | Major macroeconomic consequences (F69) |
| Financial disturbances (E32) | Amplification of shocks from other sectors (E44) |
| Comparison of available models of policy transmission (C54) | Better policy design (D78) |
| Parameter shifts (C69) | Fiscal policy effects (E62) |
| Comparison of monetary policy transmission across different model generations (E19) | Understanding of policy transmission (F42) |
| New computational approach (C63) | Better-informed policy decisions (D78) |