Marto, Ricardo (2013): Assessing the Impacts of NonRicardian Households in an Estimated New Keynesian DSGE Model.

PDF
MPRA_paper_55647.pdf Download (1MB)  Preview 
Abstract
Using Bayesian maximum likelihood and data for Portugal, I estimate a New Keynesian DSGE model allowing for the presence of nonRicardian households and test the stability of the model's prediction when the fraction of liquidityconstrained households changes. In particular, I assess the impacts on: (i) the model parameters posterior distributions; (ii) the impulse responses to six types of structural shocks; and (iii) the sources of fluctuations in output, inflation and the nominal interest rate. The first interesting result is the estimated share of nonRicardian households in the Portuguese economy, which is found to be relatively high (58%). Even under a simplistic model economy, this result seems plausible and in line with Campbell and Mankiw (1989) for the US (50% of households estimated to be liquidityconstrained) but slightly higher than for other European countries and the euro area (between 25% and 37%). I also show that differenteven if relatively closeshares of nonRicardian households provide very distinct estimates of several parameters, and uneven results and interpretations. Impulse responses to consumption preference and productivity shocks are more amplified for lower shares of liquidityconstrained households; whereas for greater proportions, the model predicts more noticeable responses to price markup and government spending shocks. Fluctuations in output growth are mainly driven by productivity shocks for a lower share of ruleofthumb consumers and by price markup shocks in the opposite scenario. Furthermore, the presence of a high proportion of nonRicardian households and a high degree of price stickiness makes the Taylortype interest rate rule solution locally indeterminate as in Galí et al. (2007).
Item Type:  MPRA Paper 

Original Title:  Assessing the Impacts of NonRicardian Households in an Estimated New Keynesian DSGE Model 
Language:  English 
Keywords:  DSGE, New Keynesian model, nonRicardian households, Bayesian inference, Portugal. 
Subjects:  C  Mathematical and Quantitative Methods > C1  Econometric and Statistical Methods and Methodology: General > C11  Bayesian Analysis: General E  Macroeconomics and Monetary Economics > E1  General Aggregative Models > E12  Keynes ; Keynesian ; PostKeynesian E  Macroeconomics and Monetary Economics > E3  Prices, Business Fluctuations, and Cycles > E37  Forecasting and Simulation: Models and Applications E  Macroeconomics and Monetary Economics > E5  Monetary Policy, Central Banking, and the Supply of Money and Credit > E52  Monetary Policy E  Macroeconomics and Monetary Economics > E6  Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62  Fiscal Policy 
Item ID:  55647 
Depositing User:  Mr. Ricardo Marto 
Date Deposited:  05 May 2014 14:07 
Last Modified:  26 Sep 2019 15:21 
References:  Abel, A. (1990), Asset Prices under Habit Formation and Catching Up with the Joneses, American Economic Review, 80(2), pp. 3842. Adão, B. (2009), The Monetary Transmission Mechanism for a Small Open Economy in a Monetary Union, Bank of Portugal, Working Paper Series N. 3. Adjemian, S., Bastani, H., Julliard, M., Mihoubi, F., Perendia, G., Ratto, M. and S. Villemot (2011), Dynare: Reference Manual, Version 4, Dynare Working Papers 1, CEPREMAP. Adolfson, M., Laseén, S., Lindé, J. and M. Villani (2007), Bayesian Estimation of an Open Economy DSGE Model with Incomplete Passthrough, Journal of International Economics, 72(2), pp. 481511. Almeida, V. (2009), Bayesian Estimation of a DSGE Model for the Portuguese Economy, Bank of Portugal, Working Paper Series N. 14. Almeida, V., Castro, G. and R. Félix (2010), Improving Competition in the Nontradable Goods and Labour Markets: The Portuguese Case, Portuguese Economic Journal, 9(3), pp. 163193. An, S. and F. Schorfheide (2007), Bayesian Analysis of DSGE Models, Econometric Reviews, 26(24), pp. 113172. Blanchard, O. and C. Kahn (1980), The Solution of Linear Difference Models under Rational Expectations, Econometrica, 48(5), pp. 13051311. Bernanke, B., Gertler, M. and S. Gilchrist (1999), The Financial Accelerator in Quantitative Business Cycles, in M. Woodford and J. B. Taylor (eds.), Handbook of Macroeconomics, 1C, Amsterdam. Brooks, P. and A. Gelman (1998), General Methods for Monitoring Convergence of Iterative Simulations, Journal of Computational and Graphical Statistics, 7(3), pp. 434455. Calvo, G. (1983), Staggered Prices in a UtilityMaximizing Framework, Journal of Monetary Economics, 12(3), pp. 383398. Campbell, J. and G. Mankiw (1989), Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence, in O. Blanchard and S. Fisher (eds.), NBER Macroeconomics Annual 1989, Cambridge MA: MIT Press, pp. 185216. Canova, F. (2007), Methods for Applied Macroeconomic Research, Princeton Univesity Press. Christiano, L., Eichenbaum, M. and C. Evans (2005), Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy, Journal of Political Economy, 113(1), pp. 145. Coenen, G. and R. Straub (2005), Does Government Spending Crowd in Private Consumption: Theory and Empirical Evidence for the Euro Area, International Finance, 8(3), pp. 435470. Dejong, D. and C. Dave (2007), Structural Macroeconometrics, Princeton University Press. DeJong, D., Ingram, B. and C. Whiteman (2000), A Bayesian Approach to Dynamic Macroeconomics, Journal of Econometrics, 98(2), pp. 203223. Del Negro, M. and F. Schorfheide (2004), Priors from General Equilibrium Models for VARs, International Economic Review, 45(2), pp. 643673. Del Negro, M., Schorfheide, F., Smets, F. and R. Wouters (2007), On the Fit of New Keynesian Models, Journal of Business and Economic Statistics, 25(2), pp. 123143. Dixit, A. and J. Stiglitz (1977), Monopolistic Competition and Optimal Product Diversity, American Economic Review, 67(3), pp. 297308. Erceg, C., Henderson, D. and A. Levin (2000), Optimal Monetary Policy with Staggered Wage and Price Contracts, Journal of Monetary Economics, 46(2), pp. 281313. Evans, G. and S. Honkapohja (2001), Learning and Expectations in Macroeconomics, Princeton University Press. FernándezVillaverde, J. and J. RubioRamírez (2004), Comparing Dynamic Equilibrium Models to Data: a Bayesian Approach, Journal of Econometrics, 123(1), pp. 153187. FernándezVillaverde, J., RubioRamírez, J. and T. Sargent (2005), A, B, C's (and D's) for Understanding VARs, Federal Reserve Bank of Atlanta, Working Paper 9. Forni, L., Monteforte, L. and L. Sessa (2009), The Estimated General Equilibrium Effects of Fiscal Policy: the Case of the Euro Area, Journal of Public Economics, 93(34), pp. 559585. Galí, J., LópezSalido, J. and J. Vallés (2004), Ruleofthumb Consumers and the Design of Interest Rate Rules, Journal of Money, Credit, and Banking, 36(4), pp. 739763. Galí, J., LópezSalido, J. and J. Vallés (2007), Understanding the Effects of Government Spending on Consumption, Journal of the European Economic Association, 5(1), pp. 227270. Gelman, A. and D. Rubin (1992), Inference from Iterative Simulation Using Multiple Sequences, Statistical Science, 7(4), pp. 457511. Geweke, J. (1999), Using Simulation Methods for Bayesian Econometric Models: Inference, Development and Communication (discussion and rejoinder), Econometric Reviews, 18(1), pp. 1126. Griffoli, T. (2011), An Introduction to the Solution and Estimation of DSGE Models, www.dynare.org. Mankiw, G. (2000), The SaversSpenders Theory of Fiscal Policy, American Economic Review, 90(2), pp. 120125. Milani, F. (2007), Expectations, Learning and Macroeconomic Persistence, Journal of Monetary Economics, 54(7), pp. 20652082. Mountford, A. and H. Uhlig (2004), What are the Effects of Fiscal Policy Shocks?, Journal of Applied Econometrics, 24(6), pp. 960992. Otrok, C. (2001), On Measuring the Welfare Costs of Business Cycles, Journal of Monetary Economics, 45(1), pp. 6192. Pereira, A. and P. Rodrigues (2002), On the Impact of a Tax Reform Package in Portugal, Portuguese Economic Journal, 1(3), pp. 205236. Perotti, R. (1999), Fiscal Policy in Good Times and Bad, Quarterly Journal of Economics, 114(4), pp. 13991436. Perotti, R. (2004), Estimating the Effects of Fiscal Policy in OECD Countries, IGIER Working Paper N. 276. Rabanal, P. and J. RubioRamírez (2005), Comparing New Keynesian Models of the Business Cycle: A Bayesian Approach, Journal of Monetary Economics, 52(6), pp. 11511166. Schorfheide, F. (2000), Loss Functionbased Evaluation of DSGE Model, Journal of Applied Econometrics, 15(6), pp. 645670. Smets, F. and R. Wouters (2003), An Estimated DSGE Model of the Euro Area, Journal of the European Economic Association, 1(5), pp. 11231175. Smets, F. and R. Wouters (2007), Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach, American Economic Review, 97(3), pp. 586606. Sousa, T. (2011), International Macroeconomic Interdependence and Imports of Oil in a Small Open Economy, Portuguese Economic Journal, 10(1), pp. 3560. Taylor, J. (1980), Aggregate Dynamics and Staggered Contracts, Journal of Political Economy, 88(1), pp. 123. Woodford, M. (2011), What's Wrong with Economic Models? A Response to John Kay, in Institute for New Economic Thinking. Yun, T. (1996), Nominal Price Rigidity, Money Supply Endogeneity and Business Cycle, Journal of Monetary Economics, 37(2), pp. 345370. 
URI:  https://mpra.ub.unimuenchen.de/id/eprint/55647 