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EURO AREA INFLATION PERSISTENCE IN AN ESTIMATED NONLINEAR DSGE MODEL
Abstract
We estimate the approximate nonlinear solution of a small DSGE model using Bayesian methods. Our results, based on euro area data, suggest that this approch delivers sharper inference compared to the estimation of the linearised solution. The nonlinear model can also account for richer economic dynamics. The impulse responses of inflation to structural shocks may vary depending on initial conditions: they are much more persistent when inflation is significantly above its long run equilibrium level.
JEL classification:
Keywords: DSGE models, policy rules, inflation persistence, second order approximations, particle filter, Bayesian estimation.