Misspecification and Expectations Correction in New Keynesian DSGE Models

Angelini, Giovanni ; Fanelli, Luca (2015) Misspecification and Expectations Correction in New Keynesian DSGE Models. Bologna, IT: Dipartimento di Scienze Statistiche "Paolo Fortunati", Alma Mater Studiorum Università di Bologna, p. 34. DOI 10.6092/unibo/amsacta/4178. In: Quaderni di Dipartimento. Serie Ricerche (1). ISSN 1973-9346.
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Abstract: This paper focuses on the dynamic misspecification that characterizes the class of small-scale New-Keynesian models and provides a `natural' remedy for the typical difficulties these models have in accounting for the rich contemporaneous and dynamic correlation structure of the data, generally faced with ad hoc shock specifications. We suggest using the `best fitting' statistical model for the data as a device through which it is possible to adapt the econometric specification of the New-Keynesian model. The statistical model may feature an autocorrelation structure that is more involved than the autocorrelation structure implied by the structural model's reduced form solution under rational expectations, and it is treated as the actual agents' expectations generating mechanism. A pseudo-structural form is built from the baseline system of Euler equations by forcing the state vector of the system to have the same dimension as the state vector characterizing the statistical model. We provide an empirical illustration based on U.S. quarterly data and a small-scale monetary New Keynesian model.

Document type
Monograph (Working Paper)
Angelini, Giovanni
Fanelli, Luca
Dynamic stochastic general equilibrium model, Expectations, Kalman filter, New Keynesian models, State space model
Deposit date
13 Mar 2015 12:18
Last modified
04 Apr 2016 15:32

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