Estimating Time-Varying DSGE Models Using Minimum Distance Methods

Abstract

Following Giraitis, Kapetanios, and Yates (2014b), this paper uses kernel methods to estimate a seven variable time-varying (TV) vector autoregressive (VAR) model on the data set constructed by Smets and Wouters (2007). We apply an indirect inference method to map from this TV VAR to time variation in implied Dynamic Stochastic General Equilibrium (DSGE) parameters. We find that many parameters change substantially, particularly those defining nominal rigidities, habits and investment adjustment costs. In contrast to the 'Great Moderation' literature our monetary policy parameter estimates suggest that authorities tried to deliver a low and stable inflation from 1975 onwards, however, the severe adverse supply shocks in the 70s could have caused these policies to fail.Keywords: DSGE, structural change, kernel estimation, time-varying VAR, monetary policy shocks JEL classification: E52, E61, E66, C14, C18 * The views expressed in this paper are those of the authors, and not necessarily those of the Bank of England or those of the Monetary or Financial Policy Committees. The authors wish to thank Andy Blake, Fabio Canova, Efrem Castelnuevo, Domenico Giannone, Alesandro Justiniano, Lutz Kilian, Matthias Paustian, Giorgio Primiceri, Juan RubioRamirez, Frank Schorfheide and Frank Smets, plus two anonymous referees for very helpful suggestions and comments. We also thank participants in presentations at the Bank of England, the Ghent workshop on empirical macro in May 2012, and the NBER workshop on methods and applications for DSGE models at the FRB Atlanta, October 2012. †

Dealing with financial instability under a DSGE modeling approach with banking intermediation: A predictability analysis versus TVP-VARs

“…And the credible sets of these parameters are considerably reduced at the end of the sample. The degree of interest rate smoothing in the Taylor rule appears to increase over time as in Castelnuovo (2012), while the reaction to in ‡ation declines during the Great Recession in line with the results by Giraitis et al (2014). The reaction to the output gap features up and down, with a decreasing trend in the latest period characterized by the zero lower bound on the nominal interest rate -which constraints conventional monetary policy.…”

“…As far as the structural parameters are concerned, they all display considerable variation over time. The Calvo parameters for both prices and wage increase in the last sample, similarly to Giraitis et al (2014). And the credible sets of these parameters are considerably reduced at the end of the sample.…”

Macroeconomic Effects of Government Spending: The Great Recession was (Really) Different

“…The nonparametric time‐varying VAR model that we use is due to Giraitis, Kapetanios, and Yates (), Giraitis et al. (). Let be an vector of observations on n variables observed at .…”

“…In particular, we employ the kernel weighted time‐varying parameter model of Giraitis, Kapetanios, and Yates (), Giraitis et al. (). This method allows to detect general patterns of time variation in impulse responses to government spending while, due to its nonparametric approach, imposing relatively few structural assumptions concerning the temporal evolution of the parameters.…”

“…Time-varying parameter VARs have relatively often been used in studies focusing on monetary policy (e.g., Primiceri 2005), but have gained comparatively little attention in the fiscal policy area. In particular, we employ the kernel weighted time-varying parameter model of Giraitis, Kapetanios, and Yates (2014), Giraitis et al (2015). This method allows to detect general patterns of time variation in impulse responses to government spending while, due to its nonparametric approach, imposing relatively few structural assumptions concerning the temporal evolution of the parameters.…”