Working Paper: NBER ID: w13099
Authors: Marco Del Negro; Frank Schorfheide
Abstract: Policy analysis with potentially misspecified dynamic stochastic general equilibrium (DSGE) models faces two challenges: estimation of parameters that are relevant for policy trade-offs and treatment of estimated deviations from the cross-equation restrictions. This paper develops and explores policy analysis approaches that are either based on a generalized shock structure for the DSGE model or the explicit modelling of deviations from cross-equation restrictions. Using post-1982 U.S. data we first quantify the degree of misspecification in a state-of-the-art DSGE model and then document the performance of different interest-rate feedback rules. We find that many of the policy prescriptions derived from the benchmark DSGE model are robust to the various treatments of misspecifications considered in this paper, but that quantitatively the cost of deviating from such prescriptions varies substantially.
Keywords: No keywords provided
JEL Codes: C32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| estimated deviations from crossequation restrictions (C20) | impact estimates of key nonpolicy parameters (C54) |
| misspecification (C50) | altered policy predictions (D78) |
| ignoring misspecification (C50) | substantial improvements in estimated policy rule parameters (C54) |
| various treatments of misspecification (C50) | robustness of policy implications (D78) |
| degree of misspecification (C50) | influence conclusions (C92) |