The past forty years or so has seen a remarkable transformation in macro-models used by central banks, policymakers and forecasting bodies. This papers describes this transformation from reduced-form behavioural equations estimated separately, through to contemporary micro-founded dynamic stochastic general equilibrium (DSGE) models estimated by systems methods. In particular by treating DSGE m...

The primary objective of this paper is to revisit DSGE models with a view to appraise their statistical adequacy and propose ways to ameliorate their empirical pertinence. This paper brings out several weaknesses of the traditional DSGE modeling, including statistical misspecification, non-identification of deep parameters, substantive inadequacy, weak forecasting performance and potentially mi...

Rational expectations are at the heart of the DSGE models maintained by central banks. A key equation which governs the evolution of prices in those models is the New Keynesian Phillips (NKPC) curve, in which today‟s rate of inflation is linked to expected future inflation. Expected future inflation is in turn modeled using rational expectations, which operationally means that forecast errors a...

This paper proposes an empirical dynamic stochastic general equilibrium (DSGE) framework to measure monetary policy when the nominal short-term interest rate is zero. The framework assumes that there exists a shadow rate which represents the monetary policy stance of a central bank. When the shadow rate is positive, it is observed as the policy rate of the central bank. However, when it is nega...

We analyze the euro area business cycle in a medium scale DSGE model where we assume two stochastic trends: one on total factor productivity and one on the in ation target of the central bank. To justify our choice of integrated trends, we test alternative speci cations for both of them. We do so, estimating trends together with the model's structural parameters, to prevent estimation biases. I...

We examine solutions in which neither player is worse off from the leadership of one in a policy maker-public game. The loop model of dynamic games is used. Outcome space is dotted with equivalence classes of solutions. The Dynamic Stochastic General Equilibrium (DSGE) results and their New Keynesian variants might represent one category. The economy is the neighborhood of a market-clearing equ...

Epstein-Zin preferences (or “EZ” preferences) have become increasingly popular in recent asset pricing work. Dynamic stochastic general equilibrium (DSGE) models which feature Epstein-Zin preferences are typically considered technically challenging, often thought to require sophisticated numerical solution methods to solve them and considerable additional thought to understand them. The purpose...

I characterize cyclical fluctuations in the cross-sectional dispersion of firm-level productivity. Using the micro-estimated dispersion, or “risk,” stochastic process as an input to a baseline DSGE financial accelerator model, I assess how well the model reproduces cyclical movements in both real and financial conditions of the economy. In the model, risk shocks calibrated to micro data lead to...