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February 15, 2014

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Posted: 15 Feb 2014 12:03 AM PST

'Are New Keynesian DSGE Models a Faustian Bargain?'

Posted: 14 Feb 2014 04:29 PM PST

Simon Wren-Lewis:

 Are New Keynesian DSGE models a Faustian bargain?: Some write as if this were true. The story is that after the New Classical counter revolution, Keynesian ideas could only be reintroduced into the academic mainstream by accepting a whole load of New Classical macro within DSGE models. This has turned out to be a Faustian bargain, because it has crippled the ability of New Keynesians to understand subsequent real world events. Is this how it happened? It is true that New Keynesian models are essentially RBC models plus sticky prices. But is this because New Keynesian economists were forced to accept the RBC structure, or did they voluntarily do so because they thought it was a good foundation on which to build? ...

'How Persistent are Monetary Policy Effects at the Zero Lower Bound?'

Posted: 14 Feb 2014 04:28 PM PST

Another paper I need to read:

How Persistent are Monetary Policy Effects at the Zero Lower Bound?, by Christopher J. Neely, FRB St. Louis: Abstract Event studies show that Fed unconventional announcements of forward guidance and large scale asset purchases had large and desired effects on asset prices but do not tell us how long such effects last. Wright (2012) used a structural vector autoregression (SVAR) to argue that unconventional policies have very transient effects on asset prices, with half-lives of 3 months. This would suggest that unconventional policies can have only marginal effects on macroeconomic variables. The present paper shows, however, that the SVAR is unstable, forecasts very poorly and therefore delivers spurious inference about the duration of the unconventional monetary shocks. In addition, implied in-sample return predictability from the SVAR greatly exceeds that which is consistent with rational asset pricing and reasonable risk aversion. Restricted models that respect plausible predictability in asset returns are more stable and imply that the unconventional monetary policy shocks were fairly persistent but that our uncertainty about their effects increases with forecast horizon. Estimates of the dynamic effects of shocks should respect the limited predictability in asset prices.

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