Forming Priors for DSGE Models (and How it Affects the Assessment of Nominal Rigidities)

49 Pages Posted: 16 May 2008

See all articles by Marco Del Negro

Marco Del Negro

Federal Reserve Bank of New York

Frank Schorfheide

University of Pennsylvania - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); University of Pennsylvania - The Penn Institute for Economic Research (PIER)

Multiple version iconThere are 3 versions of this paper

Date Written: February 2007

Abstract

In Bayesian analysis of dynamic stochastic general equilibrium (DSGE) prior distributions for some of the taste-and-technology parameters can be obtained from microeconometric or pre-sample evidence, but it is difficult to elicit priors for the parameters that govern the law of motion of unobservable exogenous processes. Moreover, since it is challenging to formulate beliefs about the correlation of parameters, most researchers assume that all model parameters are independent of each other. We provide a simple method of constructing prior distributions for (a subset of) DSGE model parameters from beliefs about the moments of the endogenous variables. We use our approach to investigate the importance of nominal rigidities and show how the specification of prior distributions affects our assessment of the relative importance of different frictions.

Keywords: Bayesian analysis, DSGE models, model comparisons, nominal rigidities, prior elicitation

JEL Classification: C32, E3

Suggested Citation

Del Negro, Marco and Schorfheide, Frank, Forming Priors for DSGE Models (and How it Affects the Assessment of Nominal Rigidities) (February 2007). CEPR Discussion Paper No. DP6119, Available at SSRN: https://ssrn.com/abstract=1133764

Marco Del Negro (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Frank Schorfheide

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

HOME PAGE: http://www.econ.upenn.edu/~schorf

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Pennsylvania - The Penn Institute for Economic Research (PIER) ( email )

Philadelphia, PA
United States

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