DSGE Model Sensitivity to Current Recession
| Authors | |
|---|---|
| Year of publication | 2010 |
| Type | Article in Proceedings |
| Conference | 28th International Conference on Mathematical Methods in Economics 2010 |
| MU Faculty or unit | |
| Citation | |
| Field | Economy |
| Keywords | Global Sensitivity Analysis; economic crisis; crisis data; recursive estimate; shock decomposition; RMSE analysis |
| Attached files | |
| Description | The goal of the paper is to investigate whether the behavior of a DSGE model changes as crisis data are incorporated into the information set. The paper comes to two major findings: a drop in the estimate of habit persistence in consumption $h$ and a jump in the persistence of the world-wide technology shock $\rho_Z$ when crisis data are incorporated. The main cause for the harsh changes in estimates of these parameters in the first quarter of crisis year 2009 is probably a two-percentage-points drop in Euroarea 3-months rates, which is a biggest quarter-to-quarter change in the time series ever. Moreover, the changes are fueled by movements in foreign inflation and output growth, which (together with the interest rate) contradict the workings of the Taylor rule. In the eyes of the model, the European central bank holds its interest rates unreasonably low. |
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