Working Paper: CEPR ID: DP6119
Authors: Marco Del Negro; Frank Schorfheide
Abstract: In Bayesian analysis of dynamic stochastic general equilibrium (DSGE) prior distributions for some of the taste-and-technology parameters can be obtained from microeconometric or pre-sample evidence, but it is difficult to elicit priors for the parameters that govern the law of motion of unobservable exogenous processes. Moreover, since it is challenging to formulate beliefs about the correlation of parameters, most researchers assume that all model parameters are independent of each other. We provide a simple method of constructing prior distributions for (a subset of) DSGE model parameters from beliefs about the moments of the endogenous variables. We use our approach to investigate the importance of nominal rigidities and show how the specification of prior distributions affects our assessment of the relative importance of different frictions.
Keywords: Bayesian analysis; DSGE models; Model comparisons; Nominal rigidities; Prior elicitation
JEL Codes: C32; E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Specification of prior distributions (C46) | Evaluation of the importance of different frictions (C69) |
| Nominal wage rigidities (J31) | Inflation persistence (E31) |
| Flexible wage models (J33) | Rejection for inability to reproduce labor share dynamics (J79) |
| Sticky prices (C54) | Explanation of macroeconomic data dynamics (E39) |
| Prior distributions (C46) | Assessment of nominal rigidities in DSGE models (C54) |