National Institute of Public Finance and Policy
18/2, Satsang Vihar Marg
Special Institutional Area
Information about this author at RePEc
NBER Working Papers and Publications
|March 2012||Posterior Predictive Analysis for Evaluating DSGE Models|
with Jon Faust: w17906
While dynamic stochastic general equilibrium (DSGE) models for monetary policy analysis have come a long way, there is considerable difference of opinion over the role these models should play in the policy process. The paper develops three main points about assessing the value of these models. First, we document that DSGE models continue to have aspects of crude approximation and omission. This motivates the need for tools to reveal the strengths and weaknesses of the models--both to direct development efforts and to inform how best to use the current flawed models. Second, posterior predictive analysis provides a useful and economical tool for finding and communicating strengths and weaknesses. In particular, we adapt a form of discrepancy analysis as proposed by Gelman, et al. (1996). ...