How relevant is empirical evidence in DSGE and macro modeling?

[emmanuelkofiameyaw]

@jpfeifer

I think there is ample evidence that money is not completely neutral.

My understanding of your statement above is something like, ‘the effect of a monetary policy shock is not completely zero, even if it is statistically insignificant’. Is that a right way to think about it? So that even if the empirical responses are not statistically significant, we can still estimate NK model for policy analysis.

@jpfeifer

For that reason, pretty much all central banks estimate their model using likelihood based techniques. That approach forces the model to explain the comovement of all observed data. The parameters should then reflect your findings.

Is the statement above why I have the following results?

1. Using initial prior values to simulate my model, interest rate increases and inflation and output fall following a monetary tightening.
2. However, for the estimated IRFs (using Bayesian methods), all three variables fall following a monetary policy tightening. Is it because the comovement between these three variables is positive in the data, and that the estimated model is capturing that positive comovement ?