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Solving, estimating and evaluating DSGE models

Humboltd University, March 2014
Fabio Canova
EUI and CEPR
Outline
The course presents a self-contained exposition of methods needed to solve and estimate
DSGE models and undertake policy analysis.
The lectures for this course will based on chapters 2, 7 and 9 and 11 of my book: Methods
for Applied Macroeconomic Research, Princeton University, Press, 2007.

Program
Monday March 3, 2014. First and second order approximations to the solution of DSGE
models.
Tuesday, March 4, 2014. Maximum likelihood estimation of DSGE models
Wednesday, March 5, 2014, Introduction bayesian estimation and posterior simulators.
Thursday, March 6, 2014, Bayesian estimation of DSGEs
Friday, March 7, 2014, Forecasting and evaluation of DSGE models.

Reading list
1) Solution of DSGE models and approximation methods
Dynamic programming and Lagrangian multipliers approach.
Perturbation methods: linear and second order approximations.
Dynare vs. other programs.
References
Cooley, T., 1995, (ed.) Frontiers of Business Cycle Research , Princeton University Press.
Marimon R. and Scott, A. ,1999, (eds.) Computational Methods for the Study of Dynamic
Economies, Oxford University Press.
King, R., Plosser, C. and Rebelo, S., 2002, Appendix to Production, Growth and Business
Cycle: I The Basic Neoclassical models, Journal of Computational Economics, 20, 87-116.

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Klein, P., 2000, Using the generalized Schur form to solve a multivariate linear rational
expectations model, Journal of Economic Dynamics and Control, 24, 1405-1423.
Uhlig, H., 1999, A methods for Analyzing Nonlinear Dynamic Stochastic Models Easily
in Marimon, R. and Scott A. (eds.) Computational Methods for the Study of Dynamic
Economies, Oxford University Press.
Schmitt-Grohe, S. and Uribe, M. 2004, Solving Dynamic General Equilibrium Models using
Second Order Approximation to the Policy function, Journal of Economic Dynamics and
Control, 28, 755-775
Kim, J., Kim S., Schaumburg, E. and Sims, C., 2008, Calculating and using Second Order
Accurate Solutions of Discrete Time Dynamic Equilibrium Models, Journal of Economic
Dynamics and Control, 32, 3397-3414.
Dynare manual, 2013, available on line at http://www.cepremap.cnrs.fr/dynare/
Den Haan, W., 2009, Perturbation methods, manuscript, available at http://www1.feb.uva.nl/
mint/wdenhaan/notes.htm.

2) Maximum likelihood estimation

State space models and Kalman lter
Prediction error decomposition and numerical tips
Frequency domain maximum likelihood
Application to DSGE models
References
Hamilton, J., 1994, Time Series Models, Princeton University Press.
Hansen, L. and Sargent, T., 1998 , Recursive linear Models of Dynamic Economies , Princeton
University Press.
Altug, S., 1989, Time to build and Aggregate Fluctuations: Some New Evidence, International Economic Review, 30, 883-920.
Kim, J., 2000, Constructing and Estimating a realistic Optimizing Model of Monetary Policy,
Journal of Monetary Economics, 45, 329-359
Ireland, P., 2000, Sticky Price Models and the Business Cycle: Specication and Stability,
Journal of Monetary Economics, 47, 3-18.

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Ireland, P., 2004, A method for taking Models to the data, Journal of Economic Dynamics
and Control, 28, 1205-1226.
Linde, J. , 2005, Estimating New Keynesian Phillips curve: A Full Information maximum
likelihood, Journal of Monetary Economics, 52, 1125-1159.
Canova, F. and Menz, T., 2011, The role of money in propagating business cycles: an international investigation, Journal of Money Credit and Banking,43, 577-609

3-4) Bayesian methods, posterior simulators and application to DSGE

Preliminaries : Bayes Theorem, Prior Selection.
Normal approximations
MCMC methods (Gibbs sampler and Metropolis-Hastings).
Bayesian DSGE models
References
Bauwens, L., M. Lubrano and J.F. Richard, 1999, Bayesian Inference in Dynamics Econometric Models , Oxford University Press.
Gelman, A., J. B. Carlin, H.S. Stern and D.B. Rubin, 1995, Bayesian Data Analysis, Chapman and Hall, London.
Robert, C. and Casella, G. , 2003, Monte Carlo Statistical Methods, Springer Verlag.
Canova, F. and Pappa, E., 2007, Price Dierential in Monetary Union: the role of scal
shocks, Economic Journal, 117, 717-737.
Casella, G. and George, E., 1992, Explaining the Gibbs Sampler, The American Statistician,
46, 167-174.
Chib, S. and Greenberg, E., 1995, Understanding the Hasting-Metropolis Algorithm, The
American Statistician, 49, 327-335.
Geweke, J., 1995, Monte Carlo Simulation and Numerical Integration in Amman, H., Kendrick,
D. and Rust, J. (eds.) Handbook of Computational Economics, Amsterdaam, North Holland,
731-800.
Tierney, L., 1994, Markov Chains for Exploring Posterior Distributions (with discussion),
Annals of Statistics, 22, 1701-1762.
An, S and Schorfheide, F. ,2007, Bayesian analysis of DSGE models, Econometric Reviews,
26, 113-172 (with discussion).

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Schorfheide, F, 2011 Estimation and Evaluation of DSGE models: Progress and challenges,
NBER working paper 16781.
Dri ll, J, Pesaran, H. Smith, R. G. Ascari, M. Miller, R. Werner (2011) The future of
macroeconomics, Manchester Journal, supplement, 1-38. (4 articles and an introduction).
Fernandez Villaverde, J., 2009, The econometrics of DSGE models, NBER working paper
14677.
Primiceri, G. and Justianiano, A., 2008, The time varying volatility of Macroeconomic Fluctuations, American Economic Review, 98, 604-641.
Smets, F. and R. Wouters, 2003, An Estimated Stochastic DSGE model of the Euro Area,
Journal of the European Economic Association, 5, 1123-1175.
Smets, F. and R. Wouters, 2007, Shocks and Frictions in US Business cycles, American
Economic Review, 97, 586-606.
Schorfheide, F., 2000 Loss function based evaluation of DSGE models, Journal of Applied
Econometrics, 15, 645-670.

5) Forecasting and evaluation of DSGE models

Topics in DSGE estimation
Evaluating DSGE models and policy analyses
References
Adolfson, M, Laseen, S., Linde, J. and Villani, M., 2008, Evaluating an Estimated new
Keynesian small open economy model, Journal of Economic Dynamics and Control, 32,
2690-2721.
Adolfson, M, Linde, J., 2008, Parameter Identication in an Estimated New Keynesian Open
Economy Model, Federal Reserve Board, manuscript.
Canova, F. and Sala, L., 2009, Back to square one: Identication issues in DSGE models,
Journal of Monetary Economics, 56(4), 431-449.
Del Negro, M, Schorfheide, F., Smets, F. and Wouters, R., 2006, On the t of New-keynesian
models, Journal of Business and Economic Statistics, 25, 143-162.
Iskrev, N., 2010, Local identication in DSGE models, Journal of Monetary Economics, 57,
189-202.

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Canova, F. and Paustian, M., 2011, Business cycle measurement with some theory, Journal
of Monetary Economics, 48, 365-381.
Chari, V., Kehoe, P. and McGratten, E., 2009, New Keynesian models: not yet useful for
policy analysis, American Economic Journal: Macroeconomics, 1, 242-266.
Canova, F., 2012, Bridging DSGE models and the data, available at http://www.crei.cat/people/canova.
Canova, F., and Ferroni, F., 2011, Multiple ltering devices for the estimation of DSGE
models, Quantitative Economics, 2, 73-98.