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Bayesian Estimation of DSGE Models$
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Edward P. Herbst and Frank Schorfheide

Print publication date: 2015

Print ISBN-13: 9780691161082

Published to Princeton Scholarship Online: October 2017

DOI: 10.23943/princeton/9780691161082.001.0001

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DSGE Modeling

DSGE Modeling

Chapter:
(p.3) Chapter 1 DSGE Modeling
Source:
Bayesian Estimation of DSGE Models
Author(s):

Edward P. Herbst

Frank Schorfheide

Publisher:
Princeton University Press
DOI:10.23943/princeton/9780691161082.003.0001

This chapter discusses how dynamic stochastic general equilibrium (DSGE) models are now widely used by academics to conduct empirical research macroeconomics, as well as by central banks to interpret the current state of the economy, to analyze the impact of changes in monetary or fiscal policy, and to generate predictions for key macroeconomic aggregates. With particular emphasis on the Bayesian estimation of DSGE models, the chapter shows how the DSGE model generates a likelihood function—a joint probability distribution for the endogenous model variables such as output, consumption, investment, and inflation that depends on the structural parameters of the model. These structural parameters characterize agents' preferences, production technologies, and the law of motion of the exogenous shocks.

Keywords:   DSGE models, Bayesian estimation, macroeconomics, fiscal policy, central banks, inflation

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