Natural Rate Measures in an Estimated DSGE Model of the U.S. Economy

Abstract

This paper presents a monetary DSGE model of the U.S. economy. The model captures the most important production, expenditure, and nominal-contracting decisions underlying economic data while remaining sufficiently small to allow it to provide a clear interpretation of the data. We emphasize the role of model-based analyses as vehicles for storytelling by providing several examples-based around the evolution of natural rates of production and interest-of how our model can provide narratives to explain recent macroeconomic fluctuations. The stories obtained from our model are both similar to and quite different from conventional accounts.

Structural Estimation of the Output Gap: A Bayesian Dsge Approach

“…According to Edge, Kiley, and Laforte (2008), who exploit a larger model for the U.S. economy and estimate the output gap that is conceptually similar to ours, their output gap has been negative at all times since the middle of the 1990s. On the other hand, our estimate of the output gap exhibits cyclical movements during the period and is successful in illustrating the business cycles.…”

“…The output gap we estimate in this paper is conceptually similar to the ones by Edge, Kiley, and Laforte (2008) for the United States and Smets and Wouters (2003) for the Euro area, who estimate larger-scale DSGE models with Bayesian techniques and extract the modelbased output gaps. 1 They define potential output as the flexible price and wage level of output attainable in the absence of the associated shocks.…”

Extending a SVAR Model of the Australian Economy*

“…The existence of two co-integrating vectors among the five variables means that there are three independent permanent components. As observed earlier, in theoretical models there is usually a single permanent component, the level of technology, although Edge et al (2008) include two components. Most theoretical models assume that domestic and foreign technology share a common I(1) component, with deviations between them being represented 9 Computations were done with MFIT5 which exploits the VARX structure in designing these tests.…”

Forecasting and Policy Making

“…Interestingly, the European Central Bank has replaced its earlier, more traditional Area-Wide Model of Fagan et al (2005) which featured largely backwardlooking dynamics, with a New-Area-Wide Model (see Christoffel et al (2008)) of the DSGE variety in the ECB staff forecasting process. 28 The Federal Reserve makes use of the FRB/EDO model of Edge et al (2008), 29 though the FRB-US model still remains its principal model for policy analysis. DSGE models used at other central banks include the ToTEM model of the Bank of Canada (Murchison and Rennison, 2006;Fenton and Murchison, 2006) and the RAMSES model used at the Swedish Riksbank (Adolfson et al, 2007b(Adolfson et al, , 2008.…”