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The Implementation of Scenarios Using DSGE Models

Igor Vetlov, Ricardo Félix (), Laure Frey (), Tibor Hlédik (), Zoltán Jakab (), Niki Papadopoulou (), Lukas Reiss () and Martin Schneider ()
Additional contact information
Laure Frey: Banque de France
Tibor Hlédik: Czech National Bank
Lukas Reiss: Oesterreichische Nationalbank

No 8, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: The new generation of dynamic stochastic general equilibrium (DSGE) models seems particularly suited for conducting scenario analysis. These models formalise the behaviour of economic agents on the basis of explicit micro-foundations. As a result, they appear less prone to the Lucas critique than more traditional macroeconometric models. DSGE models provide researchers with powerful tools, which allow for the designing of a broad range of scenarios and tackling a large range of issues, offering at the same time an appealing structural interpretation of the scenario specification and simulation results. The paper provides illustrations on some of the modelling issues that often arise when implementing scenarios using DSGE models in the context of projection exercises or policy analysis. These issues reflect the sensitivity of DSGE model-based analysis to scenario assumptions, which in more traditional models are apparently less critical, such as, for example, scenario event anticipation and duration, treatment of monetary and fiscal policy rules.

Keywords: business fluctuations; monetary policy; fiscal policy; forecasting and simulation (search for similar items in EconPapers)
JEL-codes: E32 E52 E62 E37 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2010-08-25
New Economics Papers: this item is included in nep-cba, nep-cmp, nep-cwa, nep-dge and nep-mac
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