Practical Tools for Policy Analysis in DSGE Models with Missing Channels

49 Pages Posted: 6 Jan 2013

See all articles by Dario Caldara

Dario Caldara

Board of Governors of the Federal Reserve System

Richard Harrison

Bank of England - Monetary Analysis

Anna Lipinska

Bank of England - International Economic Analysis Division

Date Written: September 13, 2012

Abstract

In this paper we analyze the propagation of shocks originating in sectors that are not present in a baseline dynamic stochastic general equilibrium (DSGE) model. Specifically, we proxy the missing sector through a small set of factors, that feed into the structural shocks of the DSGE model to create correlated disturbances. We estimate the factor structure by matching impulse responses of the augmented DSGE model to those generated by an auxiliary model. We apply this methodology to track the effects of oil shocks and housing demand shocks in models without energy and housing sectors.

Keywords: misspecification, DSGE models, policy analysis

JEL Classification: C51, C53

Suggested Citation

Caldara, Dario and Harrison, Richard and Lipinska, Anna, Practical Tools for Policy Analysis in DSGE Models with Missing Channels (September 13, 2012). FEDS Working Paper No. 2012-72. Available at SSRN: https://ssrn.com/abstract=2195712 or http://dx.doi.org/10.2139/ssrn.2195712

Dario Caldara (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Richard Harrison

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Anna Lipinska

Bank of England - International Economic Analysis Division ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

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