Identification versus misspecification in New Keynesian monetary policy models

Malin Adolfson, Stefan Laseén, Jesper Lindé and Marc Ratto

In this paper, we study identification and misspecification problems in standard closed and open-economy empirical New-Keynesian DSGE models used in monetary policy analysis. We find that problems with model misspecification still appear to be a first-order issue in monetary DSGE models, and argue that it is problems with model misspecification that may benefit the most from moving from a classical to a Bayesian framework. We also argue that lack of identification should neither be ignored nor be assumed to affect all DSGE models. Fortunately, identification problems can be readily assessed on a case-by-case basis, by applying recently developed pre-tests of identification.

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Year of publication:	08/02/2019 ; Revised November 2018
Authors:	Adolfson, Malin ; Laséen, Stefan ; Lindé, Jesper ; Ratto, Marco
Publisher:	Stockholm : Sveriges Riksbank
Subject:	Bayesian estimation \| Monte-Carlo methods \| Maximum Likelihood Estimation \| DSGE Model \| Closed economy \| Open economy \| Neoklassische Synthese \| Neoclassical synthesis \| Geldpolitik \| Monetary policy \| Offene Volkswirtschaft \| Bayes-Statistik \| Bayesian inference \| Maximum-Likelihood-Schätzung \| Maximum likelihood estimation \| Dynamisches Gleichgewicht \| Dynamic equilibrium \| DSGE-Modell \| DSGE model \| Monte-Carlo-Simulation \| Monte Carlo simulation \| Schätztheorie \| Estimation theory