-
Abstract
In view of the increasing use of Dynamic Stochastic General Equilibrium (DSGE) models in the macroeconomic projections and the policy process, this paper examines, both conceptually and empirically, alternative notions of potential output within DSGE models. Furthermore, it provides historical estimates of potential output/output gaps on the basis of selected DSGE models developed by the European System of Central Banks’ staff. These estimates are compared to the corresponding estimates obtained applying more traditional methods. Finally, the paper assesses the usefulness of the DSGE model-based output gaps for gauging inflationary pressures.
JEL Codes: E32, E37, E52.
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.
Potential output in DSGE models
The implementation of scenarios using DSGE models
-
Abstract
The new generation of dynamic stochastic general equilibrium (DSGE) models seems particularly suited for conducting scenario analysis. These models formalise the behaviour of economic agents on the basis of explicit micro-foundations. As a result, they appear less prone to the Lucas critique than traditional macroeconometric models. DSGE models provide researchers with powerful tools, which allow for the designing of a broad range of scenarios and tackling a large range of issues, offering at the same time an appealing structural interpretation of the scenario specification and simulation results. The paper provides illustrations on some of the modelling issues that often arise when implementing scenarios using DSGE models in the context of projection exercises or policy analysis. These issues reflect the sensitivity of DSGE model-based analysis to scenario assumptions, which in more traditional models are apparently less critical, such as, for example, scenario event anticipation and duration, treatment of monetary and fiscal policy rules.
JEL Codes: E32, E52, E62, E37.
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.