From Micro to Macro: A New Methodology to Discriminate Among Models

Gee Hee Hong, Ernesto Pasten, Matthew Klepacz and Raphael Schoenle
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Gee Hee Hong: International Monetary Fund
Matthew Klepacz: College of William and Mary

No 906, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We propose a new methodology to discriminate among models that uses both micro and macro moments to discipline model choice. The key insight lies in using macro moments conditional on micro moments to discipline the response of the main variable of interest following a key policy shock. Some of the micro moments may be sufficient statistics. In an application to discriminate among leading price-setting models, Calvo and menu cost, we show that both Calvo and menu cost models match key micro price moments. However, only Calvo replicates the irrelevance of kurtosis for monetary non-neutrality following a monetary policy shock. Our menu cost model can match the irrelevance of kurtosis, but at the cost of missing key micro price moments.

Date: 2019
New Economics Papers: this item is included in nep-mac
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