Posterior Predictive Analysis for Evaluating DSGE Models

No 17906, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: While dynamic stochastic general equilibrium (DSGE) models for monetary policy analysis have come a long way, there is considerable difference of opinion over the role these models should play in the policy process. The paper develops three main points about assessing the value of these models. First, we document that DSGE models continue to have aspects of crude approximation and omission. This motivates the need for tools to reveal the strengths and weaknesses of the models--both to direct development efforts and to inform how best to use the current flawed models. Second, posterior predictive analysis provides a useful and economical tool for finding and communicating strengths and weaknesses. In particular, we adapt a form of discrepancy analysis as proposed by Gelman, et al. (1996). Third, we provide a nonstandard defense of posterior predictive analysis in the DSGE context against long-standing objections. We use the iconic Smets-Wouters model for illustrative purposes, showing a number of heretofore unrecognized properties that may be important from a policymaking perspective.

JEL-codes: C52 E1 E32 E37 (search for similar items in EconPapers)
Date: 2012-03
New Economics Papers: this item is included in nep-dge, nep-ets and nep-for
Note: IFM ME
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Citations: View citations in EconPapers (19)

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Working Paper: Posterior Predictive Analysis for Evaluating DSGE Models (2010)
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