The past forty years or so has seen a remarkable transformation in macro-models used by central banks, policymakers and forecasting bodies. This papers describes this transformation from reduced-form behavioural equations estimated separately, through to contemporary micro-founded dynamic stochastic general equilibrium (DSGE) models estimated by systems methods. In particular by treating DSGE m...

Abstract Exchange rates have raised the ire of economists for more than 20 years. A problem is that there appears to be no exchange rate model that systematically beats a naive random walk in out of sample forecasts. Economists also find it irksome that theoretical models are unable to explain short-, medium-, and long-run exchange rate movements. Engel and West (2005) show that these failures ...

The Great Recession seems to be a natural experiment for economic analysis, in that it has shown the inadequacy of the predominant theoretical framework — the New Neoclassical Synthesis (NNS) — grounded on the DSGE model. In this paper, we present a critical discussion of the theoretical, empirical and political-economy pitfalls of the DSGE-based approach to policy analysis. We suggest that a m...

Tractable Latent State Filtering for Non-Linear DSGE Models Using a Second-Order Approximation* This paper develops a novel approach for estimating latent state variables of Dynamic Stochastic General Equilibrium (DSGE) models that are solved using a second-order accurate approximation. I apply the Kalman filter to a statespace representation of the second-order solution based on the ‘pruning’ ...

This paper reconsiders the developments of model evaluation in macroeconometrics over the last forty years. Our analysis starts from the failure of Cowles foundation models. The different diagnosis of this failure are then analyzed to classify them in two groups: explanations related to problems in the theoretical models that lead to problems in the identification of the relevant econometric mo...

Abstract. This paper exploits information from the term structure of survey expectations to identify news shocks in a a DSGE model with rational expectations. We estimate a structural business-cycle model with price and wage stickiness. We allow for both unanticipated and anticipated components (“news”) in each structural disturbance: neutral and investment-specific technology shocks, governmen...

This paper considers issues related to identification, inference, and computation in linearized dynamic stochastic general equilibrium (DSGE) models. We first provide a necessary and sufficient condition for the local identification of the structural parameters based on the (first and) second order properties of the process. The condition allows for arbitrary relations between the number of obs...

The relation between macroeconomic fundamentals and the cross section of asset returns is studied through the lens of dynamic stochastic general equilibrium (DSGE) models. We provide a full-information Bayesian estimation of the model using seven macroeconomic variables and extract the time series of three fundamental shocks to the economy for the period of 1966Q1-2010Q3: neutral technology (NT...