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Survey expectations, adaptive learning and inflation dynamics
Rychalovska, Y. ; Slobodyan, Sergey ; Wouters, R.
The use of survey information on inflation expectations as an observable in a DSGE model can substantially refine identification of the shocks that drive inflation. Optimal integration of the survey information improves the model forecast for inflation and for other macroeconomic variables. Models with expectations based on an Adaptive Learning setup can exploit survey information more efficiently than their Rational Expectations counterparts. The resulting time-variation in the perceived inflation target, in inflation persistence, and in the sensitivity of inflation to various shocks provide a rich and consistent description of the joint dynamics of realized and expected inflation. Our framework produces a reasonable interpretation of the post-Covid inflation dynamics. Our learning model successfully identifies the more persistent nature of the recent inflation surge.
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Professional survey forecasts and expectations in DSGE models
Rychalovska, Y. ; Slobodyan, Sergey ; Wouters, R.
In this paper, we demonstrate the usefulness of survey data for macroeconomic analysis and propose a strategy to integrate and efficiently utilize information from surveys in the DSGE setup. We extend the set of observable variables to include the data on consumption, investment, output, and inflation expectations, as measured by the Survey of Professional Forecasters (SPF). By doing so, we aim to discipline the dynamics of model-based expectations and evaluate alternative belief models. Our approach to exploit the timely information from surveys is based on re-specification of structural shocks into persistent and transitory components. Due to the SPF, we are able to improve identification of fundamental shocks and predictive power of the model by separating the sources of low and high frequency volatility. Furthermore, we show that models with an imperfectly-rational expectation formation mechanism based on Adaptive Learning (AL) can reduce important limitations implied by the Rational Expectation (RE) hypothesis. More specifically, our models based on belief updating can better capture macroeconomic trend shifts and, as a result, achieve superior long-term predictions. In addition, the AL mechanism can produce realistic time variation in the transmission of shocks and perceived macro-economic volatility, which allows the model to better explain the investment dynamics. Finally, AL models, which relax the RE constraint of internal consistency between the agents’ and model forecasts, can reproduce the main features of agents’ predictions in line with SPF evidence and, at the same time, can generate improved model forecasts, thus diminishing possible inefficiencies present in surveys.
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Essays on Monetary Policy and Estimation of DSGE Models
Rychalovska, Yuliya ; Slobodyan, Sergey (advisor) ; Žák, Milan (referee) ; Hlédik, Tibor (referee)
The thesis is motivated by current practice of policy conduct implemented by many monetary institutions. In particular, a new operational framework, inflation targeting, has been introduced by the most advanced central banks. In addition, DSGE models became widely used for systematic evaluation of macroeconomic effects of monetary policy and forecasting. In the first chapter of the thesis, I assess possible risks and challenges of implementing inflation targeting strategy in more complicated, but at the same time more realistic, DSGE model economies. I focus on analysis of optimal monetary policy and welfare in a DSGE model of a small open economy with multiple domestic sectors, which have different structural characteristics. The findings suggest that openness to trade as well as sector-specific features do matter for monetary policy design thus generating important implications for optimal stabilization objectives and social welfare. The ranking of simple rules indicates that flexible CPI targeting regime is able to closely replicate the optimal solution and outperform the policy of domestic inflation stabilization. Finally, the sensitivity analysis demonstrates that the presence of sectoral asymmetries may alter the relative performance of alternative policy rules. The second part of the thesis...
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