Policy Predictions If the Model Doesn’t Fit

Marco Del Negro and Frank Schorfheide
Working Paper 2004-38
December 2004

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This paper uses a novel method for conducting policy analysis with potentially misspecified DSGE models (Del Negro and Schorfheide 2004) and applies it to a simple New Keynesian DSGE model. We illustrate the sensitivity of the results to assumptions on the policy invariance of model misspecifications.

JEL classification: C32

Key words: Bayesian analysis, DSGE models, model misspecification

We would like to thank the participants of the 2004 EEA-ESEM session on empirical models for monetary policy analysis for helpful comments. Schorfheide gratefully acknowledges financial support from the Alfred P. Sloan Foundation. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Marco Del Negro, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8561, marco.delnegro@atl.frb.org, or Frank Schorfheide, Department of Economics, University of Pennsylvania and NYU, McNeil Building, Room 525, 3718 Locust Walk, Philadelphia, Pennsylvania 19104-6297, 215-898-8486, schorf@ssc.upenn.edu.