Title: Robust inference for dynamic economies with frictions
Authors: Andreas Tryphonides - University of Cyprus (Cyprus) [presenting]
Abstract: A new inferential methodology is proposed that is robust to misspecification of the mechanism generating frictions in a dynamic stochastic economy. The frictions can be real, nominal or informational. The approach treats economies with frictions as perturbations of a frictionless economy that are consistent with a variety of mechanisms. Models and their parameters are therefore set identified. Three contributions are made. First, we derive a characterization of the model economy that provides identifying restrictions on the solution of the model. Second, we show how qualitative survey data can be linked to the expectations of agents and how this link generates an additional set of identifying restrictions on the probability of observing a distortion in a macroeconomic variable. We provide conditions under which the additional restrictions lead to a smaller set of admissible models. Third, we show how the framework can be used to validate mechanisms that generate frictions. We propose a test statistic, derive its large sample properties and provide a bootstrap procedure to compute the critical values. Finally, we apply the methodology to estimate the distortions in the Spanish economy due to financial frictions using qualitative survey data collected by the European Commission on the financial constraints of agents, and compute a robust optimal Taylor rule.