Expectations data

[sashe86]

Hi all,

I have a question regarding the construction of the dataset prior to estimation of the DSGE model.

If we take for example the Phillips curve in the Smets&Wouters 2007 paper, we know that inflation is determined by past inflation, expected future inflation, price mark-up and a price mark-up shock.

I notice in the dataset given by Smets and Wouters 2007 - they do not mention using any expected inflation rate data, nor do they use an price mark-up data, so I'm wondering how exactly the Phillips curve is estimated when this data is not given.

The same can be said for the consumption and the investment equations, whereby expectations of future consumption and future investment are required, but not explicitly given in the dataset.

I would greatly appreciate if someone could shed some light on this for me.

Many thanks,
SAshe

[StephaneAdjemian]

Hi,

Expectations (as well as unobserved variables such as marginal cost, mark up, ...) are inferred from the model (and the observed data) under the rational expectation assumption.

Best,
Stéphane

[sashe86]

Dear Stéphane,

Many thanks for your quick response.

I have a question - does the model just estimate inflation (for example) with a lead to represent expected inflation, and then a lag to represent lagged inflation? I ask because I cannot find any inflation expectations data in my results. I have attached the .mod file in case you would like to look at it, I can't seem to be able to upload the .mat file with the results.

Thanks again,
SAshe86

[StephaneAdjemian]

Hi, Dynare solves the model under the rational expectation hypothesis, replacing the leaded variables (or group of variables) by their conditional expectation. There is no inflation expectation data in the output.
Best, Stéphane.

[jpfeifer]

If you want to estimate inflation with your model, you need to introduce an auxiliary variable of the type:

Code: Select all

inflation_expectation=pi(+1)

Tne new variable will store the conditional expectations for inflation 1 period into the future.

[sashe86]

Thank you both for your replies.

SAshe86