Assessing DSGE Model Nonlinearities

47 Pages Posted: 10 Dec 2013

See all articles by S. Borağan Aruoba

S. Borağan Aruoba

University of Maryland - Department of Economics

Luigi Bocola

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Frank Schorfheide

University of Pennsylvania - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); University of Pennsylvania - The Penn Institute for Economic Research (PIER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2013

Abstract

We develop a new class of nonlinear time-series models to identify nonlinearities in the data and to evaluate nonlinear DSGE models. U.S. output growth and the federal funds rate display nonlinear conditional mean dynamics, while inflation and nominal wage growth feature conditional heteroskedasticity. We estimate a DSGE model with asymmetric wage/price adjustment costs and use predictive checks to assess its ability to account for nonlinearities. While it is able to match the nonlinear inflation and wage dynamics, thanks to the estimated downward wage/price rigidities, these do not spill over to output growth or the interest rate.

Suggested Citation

Aruoba, S. Boragan and Bocola, Luigi and Schorfheide, Frank, Assessing DSGE Model Nonlinearities (December 2013). NBER Working Paper No. w19693, Available at SSRN: https://ssrn.com/abstract=2366007

S. Boragan Aruoba (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742
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301-405-3508 (Phone)
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Luigi Bocola

Stanford University - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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Frank Schorfheide

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
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HOME PAGE: http://www.econ.upenn.edu/~schorf

Centre for Economic Policy Research (CEPR)

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United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Pennsylvania - The Penn Institute for Economic Research (PIER) ( email )

Philadelphia, PA
United States

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