Survey_SW_2007

Abstract

The model of the U.S. economy estimated by Smets and Wouters (2007) (SW 2007 in thefollowing) with U.S. data from 1966:1 to 2004:4 may be viewed as an extended version of theCEE/ACEL model. The SW model contains a greater set of macroeconomic shocks and aims to fully explain the variation in key variables, such as aggregate output and its components as well as inflation, wages and interest rates. They use a Bayesian estimation methodology that allows the use of priors on model parameters informed from theory and literature. The posterior distributions then incorporate the information in the available macroeconomic data. Whenever the data does not help in pinpointing parameter values very precisely, theoretical priors dominate. Such priors can in some cases be based on evidence from microeconomic studies. The Bayesian estimation methodology has quickly been popularized and widely applied by researchers in central banks and academia. It has been implemented for use with the DYNARE software that we also utilize in our model base.