A Proposal for a Flexible Trend Specification in DSGE Models

Open access


In this paper I propose a flexible trend specification for estimating DSGE models on log differences. I demonstrate this flexible trend specification on a New Keynesian DSGE model of two economies, which I consequently estimate on data from the Czech economy and the euro area, using Bayesian techniques. The advantage of the trend specification proposed is that the trend component and the cyclical component are modelled jointly in a single model. The proposed trend specification is flexible in the sense that smoothness of the trend can be easily modified by different calibration of some of the trend parameters. The results suggest that this method is capable of finding a very reasonable trend in the data. Moreover, comparison of forecast performance reveals that the proposed specification offers more reliable forecasts than the original variant of the model.

ADOLFSON, M., LASEEN, S., LINDE, J., VILLANI, M. (2007). Bayesian Estimation of an Open Economy DSGE Model with Incomplete Pass-Through. Journal of International Economics, 72(2), pp. 481-511.

AGUIAR, M., GOPINATH, G. (2007). Emerging Market Business Cycles: The Cycle Is the Trend. Journal of Political Economy, 115(1), pp. 69-102.

ANDRLE, M. (2008). The Role of Trends and Detrending in DSGE Models. MPRA Paper No. 13289.

BRŮHA, J. (2011). An Empirical Small Labor Market Model for the Czech Economy. Finance a úvěr - Czech Journal of Economics and Finance, 61(5), pp. 434-449.

CALVO, G. (1983). Staggered Prices in a Utility Maximizing Framework. Journal of Monetary Economics, 12(3), pp. 383-398. DOI: 10.1016/0304-3932(83)90060-0

CANOVA, F. (1998). Detrending and Business Cycle Facts. Journal of Monetary Economics, 41(3), pp. 475-512. DOI: 10.1016/S0304-3932(98)00006-3

CANOVA, F. (2013). Bridging Cyclical DSGE Models and the Raw Data. CEPR Discussion Papers 9379.

CANOVA, F., FERRONI, F. (2011). Multiple Filtering Devices for the Estimation of Cyclical DSGE Models. Quantitative Economics, 2(1), pp. 73-98. DOI: 10.3982/QE36

COGLEY, T. (2001). Estimating and Testing Rational Expectations Models when the Trend Specification Is Uncertain. Journal of Economic Dynamics and Control, 25(10), pp. 1485-1525. DOI: 10.1016/S0165-1889(99)00083-4

KOLASA, M. (2009). Structural Heterogeneity or Asymmetric Shocks? Poland and the Euro Area through the Lens of a Two-country DSGE Model. Economic Modelling, 26(6), pp. 1245-1269. DOI: 10.1016/j.econmod.2009.06.001

KOOP, G. (2003). Bayesian Econometrics. Chichester: John Wiley & Sons Ltd.

McGRATTAN, E. R. (2010). Measurement with Minimal Theory. Quarterly Review, 33(1), pp. 2-13.

SLANICAY, M. (2012). A Proposal of Flexible Trend Specification in DSGE Models. In Ramík, J., Stavárek, D., Proceedings of 30th International Conference Mathematical Methods in Economics. Karviná: Silesian University, pp. 811-816.

SMETS, F., WOUTERS, R. (2003). An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area. Journal of the European Economic Association, 1(5), pp. 1123-1175. DOI: 10.1162/154247603770383415

WHELAN, K. (2006). New Evidence on Balanced Growth, Stochastic Trends, and Economic Fluctuations. MPRA Paper No. 5910.

Review of Economic Perspectives

Národohospodárský obzor; The Journal of Masaryk University

Journal Information

CiteScore 2017: 0.42

SCImago Journal Rank (SJR) 2017: 0.153
Source Normalized Impact per Paper (SNIP) 2017: 0.351

Cited By


All Time Past Year Past 30 Days
Abstract Views 0 0 0
Full Text Views 230 222 20
PDF Downloads 88 85 10