Abstract:
We build the time-varying parameter feature into the (Sims, E., J. C. Wu, and J. Zhang. 2023. “The Four-Equation New Keynesian Model.” The Review of Economics and Statistics 105 (4): 931–47) four-equation Dynamic Stochastic General Equilibrium (DSGE) model in this paper. We find that both parameters and impulse responses of the variables in the four-equation DSGE model exhibit significant variation over time. Allowing model parameters to vary over time also improves the model’s forecasting performance.
