Trend Mis-specifications and Estimated Policy Implications in DSGE Models

Varang Wiriyawit ()

ANU Working Papers in Economics and Econometrics from Australian National University, College of Business and Economics, School of Economics

Abstract: Extracting a trend component from nonstationary data is one of the first challenges in estimating a DSGE model. The misspecification of the component can distort structural parameter estimates and translate into a bias in policy-relevant statistic estimates. This paper investigates how important this bias is to estimated policy implications within a DSGE framework. The quantitative results suggest the bias in parameter estimates due to trend misspecification can result in significant inaccuracies in estimating statistics of interest. This then misleads policy conclusions. Particularly, a misspecified model is estimated using a deterministic-trend specification when the true process is a random-walk with drift.

JEL-codes: C51 C52 E37 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2014-04
New Economics Papers: this item is included in nep-dge, nep-ecm and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:acb:cbeeco:2014-615

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