Solution-Driven Specification of DSGE Models

Francisco Blasques ()

No 13-062/III, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This paper proposes a functional specification approach for dynamic stochastic general equilibrium (DSGE) models that explores the properties of the solution method used to approximate policy functions. In particular, the solution-driven specification takes the properties of the solution method directly into account when designing the structural model in order to deliver enhanced flexibility and facilitate parameter identification within the structure imposed by the underlying economic theory. A prototypical application reveals the importance of this method in improving the specification of functional nonlinearities that are consistent with economic theory. The solution-driven specification is also shown to have the potential to greatly improve model fit and provide alternative policy recommendations when compared to standard DSGE model designs.

Keywords: Nonlinear Model Specification; DSGE; Perturbation Solutions (search for similar items in EconPapers)
JEL-codes: C51 E17 E37 (search for similar items in EconPapers)
Date: 2013-04-19
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20130062

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