Bayesian estimation and evaluation of the segmented markets friction in equilibrium monetary models

This paper develops, estimates and evaluates a heterogeneous agents segmented markets model with endogenous production and a monetary authority that follows a Taylor-type interest rate rule. We find that adding the segmented markets friction significantly improves the statistical out-of-sample predi...

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Bibliographic Details
Published in:Journal of macroeconomics 2008-03, Vol.30 (1), p.444-461
Main Authors: Landon-Lane, John, Occhino, Filippo
Format: Article
Language:English
Subjects:
Bayesian analysis
Bayesian method
Economic models
Economic shock
Estimates
Estimation
Limited participation
Markov chain Monte Carlo
Monetary economics
Monetary equilibrium
Monetary models
Monetary policy
Monetary policy shocks
Segmented markets
Studies
Taylor rule
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Summary:This paper develops, estimates and evaluates a heterogeneous agents segmented markets model with endogenous production and a monetary authority that follows a Taylor-type interest rate rule. We find that adding the segmented markets friction significantly improves the statistical out-of-sample prediction performance of the model, and helps generate delayed and realistic impulse response functions to monetary policy shocks. The estimated segmented markets model also outperforms the standard limited participation model, both in terms of marginal likelihood and of qualitative features of the impulse response function. We estimate the fraction of households participating in financial markets to be approximately 22%.
ISSN:0164-0704
1873-152X
DOI:10.1016/j.jmacro.2006.12.004