Techniques for Building Small Macroeconometric Models.

Techniques for Building Small Macroeconometric Models. Adrian Pagan

Lecture 1 Model Design 1. Interpretative and summative models 2. Design of interpretative models- SVARs, New Keynesian (NK), Dynamic Stochastic General Equilibrium (DSGE) Models 3. SVAR Model Design– short-run and sign restrictions Lecture 2 Theory Based Interpretative Models 1. NK Models – Gaps and Inter-temporal Optimization 2. DSGE Models – model design by inter-temporal optimization Lecture 3 Estimation Methods for Interpretative Models 1. 2. 3. 4.

Method of moments - Instrumental Variables Kalman filter based MLE Indirect Estimation - Impulse Response Matching Constrained MLE – Bayesian Mode Estimation

Lecture 4 Estimating the Interpretative Models 1. SVARs 2. NK Models – extracting model consistent gaps 3. DSGE Models

Lecture 5 Model Design and Estimation Issues with Permanent Components 1. SVECMS and Long-run Restrictions on SVARs 2. NK and DSGE Models

Reading List Lecture 1 Canova, F. and G. de Nicolo (2002), "Monetary Disturbances Matter for Business Fluctuations in the G7", Journal of Monetary Economics, 49, 11311159. Faust, J. (1998), " The Robustness of Identified VAR Conclusions about Money", Carnegie-Rochester Series on Public Policy, 49, 207-244.

Fry and Pagan “Some Issues in Using Sign Restrictions for Identifying Structural VARs”, mimeo Uhlig, H. (2005), " What are the Effects of Monetary Policy on Output: Results from an Agnostic Identification Scheme", Journal of Monetary Economics, 52, 381-419.

Lecture 2 An, S and F. Schorfheide (2006), “Bayesian Analysis of DSGE Models”, Econometric Reviews (forthcoming) A.. Berg, P. Karam and D. Laxton (2006), "Practical Model-Based Monetary Policy Analysis -- a How-to Guide", IMF Working Paper No 81 Binder, M and M.H.. Pesaran (1995), "Multivariate Rational Expectations Models and Macroeconomic Modelling: A Review and Some New Results" in M.H. Pesaran and M Wickens (eds) Handbook of Applied Econometrics: Macroeconomics, Basil Blackwell, Oxford. (use Kapetanios stuff) Dennis, R. (2005), “Specifying and Estimating New Keynesian Models with Instrument Rules and Optimal Monetary Policies” Federal Reserve Bank of San Francisco Working Paper 2004-17 Gali, J.and M.Gertler (1999), "Inflation Dynamics: A Structural Econometric Analysis " Journal of Monetary Economics, 44, 195-222. Piretti, A and C. St-Arnaud (2006), “Launching the NEUQ: The New European Union Quarterly Model, a Small Model of the Euro Area and U.K. Economies”, Bank of Canada Working Paper 2006-22 Smets, F. and R. Wouters (2003),"An Estimated Dynamic Stochastic General Equilibirum Model of the Euro Area", Journal of the European Economic Association, 1, 1123-1175.

Lecture 3

Brundy, J.M. and D.W. Jorgenson (1971), "Efficient Estimation of Simultaneous Equations by Instrumental Variables", Review of Economics and Statistics, 53,207-234.

Canova, F. and L. Sala (2005), "Learning about the Parameters and the Dynamics of DSGE Models: Identification and Estimation", paper presented to the Model Evaluation Conference, Oslo, May 2005 Christiano, L.J., M. Eichenbaum and C.L. Evans (2005), “ Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy”, Journal of Political Economy, 113, 1-45. Fuhrer, J.C. and G.P. Olivei (2004), "Estimating Forward-Looking Euler Equations with GMM and Maximum Likelihood Estimators: An Optimal Instruments Approach", paper presented to the Conference on Models and Monetary Policy, Federal Reserve Bank Board of Governors, March Ireland, P. (2004), "A Method for Taking Models to the Data", Journal of Economic Dynamics and Control, 28, 1205-1226. Linde, J. (2004), "Estimating New-Keynesian Phillips curves: A FIML approach", Journal of Monetary Economics Schorfheide, F. (2000), "Loss Function-Based Evaluation of DSGE Models", Journal of Applied Econometrics, 15, 645-670. Dynare Version 3.06.04 available at http://www.cepremap.cnrs.fr/dynare/

Lecture 4 Chari, V.V., P.J. Kehoe and E. R. McGrattan (2004), "A Critique of Structural VARs Using Real Business Cycle Theory", Working Paper no 631 Federal Reserve Bank of Minneapolis

Christiano, L. J., M. Eichenbaum and R. Vigfuson (2006), “Assessing Structural VARs”, Northwestern University, mimeo Erceg, C.J., L. Guerrieri and C. Gust (2004), "Can Long-Run Restrictions Identify Technology Shocks?", International Finance Discussion Paper 792, Board of Governors of the Federal Reserve System. Fukacs, M and A. R. Pagan (2007), “Observations on DeCecio and Nelson "An Estimated DSGE Model for the United Kingdom", Federal Reserve Bank of St Louis Review (forthcoming) Kehoe, P.J. (2006), “How to Advance Theory with Structural VARs: Use the Sims-Cogley-Nason Approach”; Federal Reserve Bank of Minneapolis Staff Report 379

Nason, J.M. and G.W. Smith (2005), "Identifying the New Keynesian Phillips Curve", Working Paper 2005-1, Federal Reserve Bank of Atlanta Peersman, G. and R. Straub (2006), "Putting the New Keynesian Model to a Test", IMF Working Paper, 06/135

Lecture 5 Blanchard, O.J. and D. Quah (1989), "The Dynamic Effects of Aggregate Demand and Supply Disturbances", The American Economic Review, 79, 655673. Gali, J. (1992), "How Well does the ISLM Model Fit Postwar U.S. Data?", Quarterly Journal of Economics, 107, 709-735. Garratt, A., Lee, K., M.H. Pesaran and Y. Shin (2006), Global and National Macroeconometric Modelling: A long-run structural approach, Oxford University Press, Oxford. Harvey, A.C. and A. Jaeger, (1993), "De-Trending, Stylized Facts and the Business Cycle", Journal of Applied Econometrics, 8, 231-247 Lubik, T.A. and F. Schorfheide (2005) " Do Central Banks respond to exchange Rate Movements? A Structural Investigation", Journal of Monetary Economics, (forthcoming) Pagan, A.R. and M.H. Pesaran (2007), “On Econometric Analysis of Structural Systems with Permanent and Transitory Shocks and Exogenous Variables”, National Centre for Econometric Research Working Paper No 7 (at www.ncer.edu.au) Pagan, A.R. and J. Robertson (1998), "Structural Models of the Liquidity Effect", Review of Economics and Statistics, 80, 202-217. Peersman, G. (2005), "What Caused the Early Millenium Slowdown? Evidence Based on Autoregressions", Journal of Applied Econometrics, 20, 185-207. Wickens, M.R. and R. Motto (2001), "Estimating Shocks and Impulse Response Functions", Journal of Applied Econometrics, 16, 371-387.