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Uncertainty Of Model’s Parameters And Exogeneous Shocks And Its Macroeconomic Effects

Posted on:2015-07-11Degree:DoctorType:Dissertation
Country:ChinaCandidate:J Y LiuFull Text:PDF
GTID:1109330428465767Subject:Quantitative Economics
Abstract/Summary:PDF Full Text Request
In addition to canonical assumptions of New Keynes macroeconomic analysis, dynamic stochastic general equilibrium (DSGE) paradigm explicitly supposes that the structural model parameters are well informed and introduced exogenous shocks are homogeneous. In fact, incomplete information is one of important characteristics in economic environment. In face of varied uncertainty, particularly about model parameters, monetary authority should consider the effects of uncertainty on policy choices. On the other hand, in comparison with assumptions of homogeneous shocks (fixed volatility), a lot of researches shows that stochastic volatility shock, which used to characterize uncertain distribution of shocks, can do a better job in describing real business cycle. As a developing country with rapid economic growth, China is facing with larger amplitude of macroeconomic fluctuation due to more uncertain and risk factors, so in economic modeling it is necessary to consider such enhanced exogenous shocks. In DSGE framework, because some key factors such as various nominal and real friction and monopoly competition are introduced, the effects and transmission mechanism of uncertain shocks may completely differ and some research conclusion may be changed. After reviewing relevant literatures and research methods, this dissertation conducts the deep studies on effects of uncertainty about structural parameters and exogenous on macro economy.In order to analyze the normative characteristics of optimal money supply mechanism and the effects of uncertain parameters, chapter3outlines a DSGE model featuring cash in advance (CIA) and non-stationary shocks in which money supply growth is one of policy instruments. Based on Bayesian estimation of structural parameters, the parameter’s posterior mean is regarded as fixed when the authority makes policy decision as usual, and parameter’s posterior distribution is used as policy maker’s knowledge about parameter’s uncertainty, then optimal money supply mechanisms in two cases are evaluated respectively. The comparison shows that the optimal mechanism in the case of uncertain parameters is more cautious against inflation and output fluctuation, but the policy order sorting will not be influenced as comparing with the case of fixed parameters. In addition, optimal policy is characterized by super inertia, forward looking and strong counter reaction to inflation.The chapter4establishes a DSGE model embedded with stochastic volatility of money and fiscal shock, demand and investment specific shocks, and neutral technological shocks. The combination method of particle filtering and MH sampling is adopted to evaluate the path of policy instrument and policy shock, and a hybrid of linear model based Bayesian evaluation and SMM method is used for parameter calibration. In the analysis of impulse response and variance decomposition, the DSGE model is approximated by third-order perturbation method. Specifically, the macroeconomic effects of key parameter’s uncertainty and the contributions of uncertain exogenous shocks are discriminated by counterfactual analysis. The research first shows that structural and policy shock could be characterized by stochastic volatility and the evolution of two policy shocks are highly consistent, but the volatility of monetary policy shock is higher than that of fiscal shock in average. Moreover, the inertia of structural stochastic shock is clearly strong than that of policy shock. In addition, monetary and fiscal volatility shocks have counter cyclicality. The impulses analysis indicates that the stochastic volatility shocks of demand, neutral technology, and monetary and fiscal policy could be stagflation through model’s rigid effect and household’s cautionary saving behavior, but investment specific volatility shock will result in the increase of output and inflation and the decrease of consumption mainly through the effect of cautionary saving and real option. Last, the counterfactual analysis finds that the influence of monetary policy uncertainty could be improved by enhancing adverse response to inflation or by reducing positive response to output, and the counter cyclical fiscal policy would weaken the effect of uncertain fiscal policy.The dissertation’s main contributions are summarized as follows. First, based on Bayesian ideas, the introduced function of policy goal is approximated by sampling of parameter’s posterior distribution, and the solution is outlined to evaluate the optimal money supply mechanism in the case of uncertain structural parameters. Second, the relative weights of policy instruments in goal are calibrated on basis of unconstrained Ramsey optimal policy, so it makes feasible to calculate different optimal monetary policy under different constraint conditions such as backward looking, forward looking and current oriented. Third, both the effects of uncertain structural and policy shock on macro economics and the contributions of stochastic volatility to business cycle are systematically analyzed, in which the problems such as how to calculate impulse response and variance decomposition under higher order approximation of model is well solved.
Keywords/Search Tags:Uncertain Parameters, Exogenous Shocks, DSGE Model, Stochastic Volatility, Money Supply Mechanism, Particle Filtering, High Order Approximation
PDF Full Text Request
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