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Solution-Driven Specification of DSGE Models

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  • Francisco Blasques

    (VU University Amsterdam)

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.

Suggested Citation

  • Francisco Blasques, 2013. "Solution-Driven Specification of DSGE Models," Tinbergen Institute Discussion Papers 13-062/III, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20130062
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    File URL: https://papers.tinbergen.nl/13062.pdf
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    References listed on IDEAS

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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Solution-Driven Specification of DSGE Models
      by Christian Zimmermann in NEP-DGE blog on 2013-05-08 18:34:28

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    More about this item

    Keywords

    Nonlinear Model Specification; DSGE; Perturbation Solutions;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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