How Structural Are Structural Parameters?
This paper studies how stable over time are the so-called "structural parameters" of dynamic stochastic general equilibrium (DSGE) models. To answer this question, we estimate a medium-scale DSGE model with real and nominal rigidities using U.S. data. In our model, we allow for parameter drifting and rational expectations of the agents with respect to this drift. We document that there is strong evidence that parameters change within our sample. We illustrate variations in the parameters describing the monetary policy reaction function and in the parameters characterizing the pricing behavior of firms and households. Moreover, we show how the movements in the pricing parameters are correlated with inflation. Thus, our results cast doubts on the empirical relevance of Calvo models.
We thank the editors, Daron Acemoglu, Kenneth Rogoff, and Mike Woodford; our two discussants, Tim Cogley and Frank Schorfheide; Pau Rabanal, Garey Ramey, Stephanie Schmitt-Grohé, and Martín Uribe, and participants at the NBER Macroeconomics Annual conference for comments. Beyond the usual disclaimer, we must note that any views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Finally, we also thank the NSF for financial support. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.