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Our Research Catalogue contains grants and outputs data up until April/May 2014.

Monetary and Fiscal Policy Rules with Labour Market and Financial Frictions

Grant reference: RES-062-23-2451

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Journal article details

Endogenous persistence in an estimated DSGE model under imperfect information
This paper relaxes the standard information assumptions associated with rational expectations (RE) models. We firstly set out a procedure for estimating models under very general information assumptions. Secondly we apply this to two New Keynesian (NK) models: the first stays within the conventional RE framework, but relaxes the extreme perfect information assumptions for the private sector. The second ‘behavioural’ model allows a proportion of agents to form expectations in an adaptive fashion. Both of these departures from the standard approach introduce endogenous persistence which could provide a better match to the data. We follow the established practice of estimating our models by Bayesian methods. Most practitioners make asymmetric information assumptions, where perfect information about current shocks is available to economic agents but not to the econometrician. Although information on idiosyncratic shocks may be available to economic agents, it is incompatible with model-consistent expectations to assume full information on economy-wide shocks. Thus we compare asymmetric information with informational symmetry, where agents have the same imperfect information set as the econometrician. Our modelling strategy is to disentangle the effects of all the persistence mechanisms in the NK model, namely those from habit, price indexing, imperfect information and adaptive learning in the behavioural model. Across both information assumptions (perfect and imperfect) and in both the purely rational and behavioural models we find that only the habit mechanism improves the model fit and there is no empirical support for price indexation. We also find that the endogenous persistence introduced by imperfect information can significantly improve the fit of the data. However our results as a whole suggest that the other mechanisms, habit and adaptive learning, are together empirically more important.
10.1111/j.1468-0297.2012.02524.x
English

Primary contributor

Author Paul Levine

Additional contributors

Co-author Joseph Pearlman
Co-author George Perendia
Co-author Bo Yang

Additional details

122
565
Yes
0013-0133
http://olabout.wiley.com/WileyCDA/Section/id-406241.html
Blackwell Publishing
01 December 2012
26
1287-1312
Oxford
Post-print
Economic journal

Cite this outcome

Harvard

Levine, Paul et al (2012) Endogenous persistence in an estimated DSGE model under imperfect information. Economic journal. 122 (565), pp. 1287-1312 Oxford: Blackwell Publishing.

Vancouver

Levine Paul et al. Endogenous persistence in an estimated DSGE model under imperfect information. Economic journal 2012; 122 (565): 1287-1312.