Assessing the Impacts of Non-Ricardian Households in an Estimated New Keynesian DSGE Model

Marto, Ricardo (2013): Assessing the Impacts of Non-Ricardian Households in an Estimated New Keynesian DSGE Model.

Abstract

Using Bayesian maximum likelihood and data for Portugal, I estimate a New Keynesian DSGE model allowing for the presence of non-Ricardian households and test the stability of the model's prediction when the fraction of liquidity-constrained households changes. In particular, I assess the impacts on: (i) the model parameters posterior distributions; (ii) the impulse responses to six types of structural shocks; and (iii) the sources of fluctuations in output, inflation and the nominal interest rate. The first interesting result is the estimated share of non-Ricardian households in the Portuguese economy, which is found to be relatively high (58%). Even under a simplistic model economy, this result seems plausible and in line with Campbell and Mankiw (1989) for the US (50% of households estimated to be liquidity-constrained) but slightly higher than for other European countries and the euro area (between 25% and 37%). I also show that different-even if relatively close-shares of non-Ricardian households provide very distinct estimates of several parameters, and uneven results and interpretations. Impulse responses to consumption preference and productivity shocks are more amplified for lower shares of liquidity-constrained households; whereas for greater proportions, the model predicts more noticeable responses to price markup and government spending shocks. Fluctuations in output growth are mainly driven by productivity shocks for a lower share of rule-of-thumb consumers and by price markup shocks in the opposite scenario. Furthermore, the presence of a high proportion of non-Ricardian households and a high degree of price stickiness makes the Taylor-type interest rate rule solution locally indeterminate as in Galí et al. (2007).

• Item Type: MPRA Paper
• Language: English
• Keywords: DSGE, New Keynesian model, non-Ricardian households, Bayesian inference, Portugal.
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C11 - Bayesian Analysis: General; E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E12 - Keynes ; Keynesian ; Post-Keynesian; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy

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