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Discussion on the LSM (Fontagné, Maffezzoli and Marcellino), by O. Pierrard

Discussion on the LSM (Fontagné, Maffezzoli and Marcellino), by O. Pierrard. DSGE’S IN HISTORICAL PERSPECTIVE. Backward looking macroeconometric models (Keynes, Hicks, IS-LM) from data to theory Lucas’ critique on deep structural parameters (1976) and rational expectations

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Discussion on the LSM (Fontagné, Maffezzoli and Marcellino), by O. Pierrard

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  1. Discussion on the LSM (Fontagné, Maffezzoli and Marcellino),by O. Pierrard

  2. DSGE’S IN HISTORICAL PERSPECTIVE • Backward looking macroeconometric models (Keynes, Hicks, IS-LM) from data to theory • Lucas’ critique on deep structural parameters (1976) and rational expectations • Forward looking micro founded models (Kydland and Prescott, 1982) from theory to data • Last generation of New-Keynesian models (or DSGE models) -> LSM by Fontagné, Maffezzoli and Marcellino

  3. POTENTIAL UTILIZATIONS • Short run forecasts ??? Need of heterogeneity, need to escape from steady state in case of crises. Difficult with DSGE models. • Understanding of shock transmission channels • Medium and/or long run forecasts

  4. LSM • Impressive work at the frontier of research • Utilisation to explain potential effects of policies and medium/long run forecasts: great! • Essential if we want to be serious about policy implementation and recommendation • Nice: assets, goods market, open economy • Exogenous but probably difficult to endogenise: commuters’ behaviour • Discussion: demography and labour market

  5. DEMOGRAPHY • Blanchard (1985) OLG approach: households have constant probability  to die • Advantage: simplicity (easy aggregation) • and ‘households have finite lives’ : yes but… • Strong implications for demography • Difficult to study demography and/or retirement related questions

  6. DEMOGRAPHY (ctd)

  7. DEMOGRAPHY (ctd)

  8. LABOUR MARKET • Wage formation mechanism not benchmark • With some simulations (mainly productivity shocks), strong effect on wages which leaves employment almost unaffected (also in QUEST) • Potential implication (at least with productivity shocks): volatile and procyclical wages, rigid and acyclical employment • Real data (1984-2006, CKL 2008) :

  9. LABOUR MARKET (ctd) • Alternative approach: Diamond-Mortensen-Pissarides (search unemployment) • Simulations: LSM vs. DMP

  10. DEMOGRAPHY AND LABOUR MARKET

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