On the Fit of New Keynesian Models

Marco Del Negro · Frank Schorfheide · Frank R. Smets · Rafael Wouters

509 citations0/0 files storedJournal of Business and Economic Statistics

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Monetary Policy and Economic Impact Economic Theory and Policy Economic theories and models

Abstract

This article provides new tools for the evaluation of dynamic stochastic general equilibrium (DSGE) models and applies them to a large-scale new Keynesian model. We approximate the DSGE model by a vector autoregression, and then systematically relax the implied cross-equation restrictions and document how the model fit changes. We also compare the DSGE model's impulse responses to structural shocks with those obtained after relaxing its restrictions. We find that the degree of misspecification in this large-scale DSGE model is no longer so large as to prevent its use in day-to-day policy analysis, yet is not small enough to be ignored.

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References

1993Discretion versus policy rules in practice 1982Time to Build and Aggregate Fluctuations 2005Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy 1996Staggered Prices in a Utility-Maximizing Framework 2003An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area 1997An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy 2004Some Evidence on the Importance of Sticky Prices 2002Some Evidence on the Importance of Sticky Prices

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