Assessing DSGE model nonlinearities |
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| Institution: | 1. Department of Economics, University of Maryland, College Park, MD 20742, USA;2. Department of Economics, Northwestern University, Evanston, IL 60208, USA;3. Department of Economics, University of Pennsylvania, Philadelphia, PA 19104, USA;1. Economic Research Department, Federal Reserve Bank of Kansas City, United States;2. Department of Economics and Legal Studies, Oklahoma State University, United States;3. Institute of Economics, National Sun Yat-Sen University, Taiwan;4. International Monetary Fund, United States |
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| Abstract: | We develop a new class of time series models to identify nonlinearities in the data and to evaluate DSGE models. U.S. output growth and the federal funds rate display nonlinear conditional mean dynamics, while inflation and nominal wage growth feature conditional heteroskedasticity. We estimate a DSGE model with asymmetric wage and price adjustment costs and use predictive checks to assess its ability to account for these nonlinearities. While it is able to match the nonlinear inflation and wage dynamics, thanks to the estimated downward wage and price rigidities, these do not spill over to output growth or the interest rate. |
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