https://shs.hal.science/halshs-01661908Hirose, YasuoYasuoHiroseSunakawa, TakekiTakekiSunakawaUTokyo - The University of TokyoCEAFJP - Centre d’études avancées franco-japonais de Paris - FFJ - Fondation France-Japon de l'EHESS - EHESS - École des hautes études en sciences socialesParameter Bias in an Estimated DSGE ModelParameter Bias in an Estimated DSGE ModelHAL CCSD2016NonlinearityZero lower boundDSGE ModelBayesian estimation[SHS.ECO] Humanities and Social Sciences/Economics and FinanceBeaudequin, Dora2017-12-12 13:53:352021-05-17 12:00:042017-12-13 10:11:34enPreprints, Working Papers, ...application/pdf1How can parameter estimates be biased in a dynamic stochastic general equilibrium model that omits nonlinearity in the economy? To answer this question, we simulate data from a fully nonlinear New Keynesian model with the zero lower bound constraint and estimate a linearized version of the model. Monte Carlo experiments show that significant biases are detected in the estimates of monetary policy parameters and the steady-state inflation and real interest rates. These biases arise mainly from neglecting the zero lower bound constraint rather than linearizing equilibrium conditions. With fixed parameters, the variance-covariance matrix and impulse response functions of observed variables implied by the linearized model substantially differ from those implied by its nonlinear counterpart. However, we find that the biased estimates of parameters in the estimated linear model can make most of the differences small.