Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 362: Identification Versus Misspecification in New Keynesian Monetary Policy Models

Malin Adolfson, Stefan Laséen, Jesper Lindé (jesper.linde@riksbank.se) and Marco Ratto
Additional contact information
Malin Adolfson: Research Department, Central Bank of Sweden
Stefan Laséen: Monetary Policy Department, Central Bank of Sweden
Jesper Lindé: Research Department, Central Bank of Sweden, Postal: and CEPR
Marco Ratto: Financial Stability Department, Central Bank of Sweden

Abstract: 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 bene.t 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.

Keywords: Bayesian estimation; Monte-Carlo methods; Maximum Likelihood Estimation; DSGE Model; Closed economy; Open economy

JEL-codes: C13; C51; E30

60 pages, November 1, 2018

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