Are DSGE approximating models invariant to shifts in policy?

Timothy Cogley, Takeshi Yagihashi

    Research output: Contribution to journalArticlepeer-review

    Abstract

    Bayesian and maximum-likelihood estimates of structural parameters in DSGE approximating models are invariant to shifts in policy only when the model is correctly specified. Since DSGE models are approximations, strict invariance is unattainable. Despite that, DSGE models might be useful for policy analysis provided that structural parameters are approximately invariant. We discuss this issue in the context of an example involving a pair of new Keynesian DSGE models in which the central bank's policy model includes a misspecified Phillips curve. In our example, the approximating model is a useful guide for policy despite the failure of strict invariance.

    Original languageEnglish (US)
    Article number27
    JournalB.E. Journal of Macroeconomics
    Volume10
    Issue number1
    DOIs
    StatePublished - 2010

    Keywords

    • Bayesian estimate
    • DSGE approximating models
    • Lucas critique

    ASJC Scopus subject areas

    • Economics and Econometrics

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