DSGE model of the Dutch economy

DNB has constructed a new-Keynesian DSGE model tailored to the Netherlands. It is a multivariate unobserved components model in which three major stochastic trends in the data are identified—trends in general-purpose technology, investment-specific technology, and labor supply—which are modeled formally in the theoretical set-up.

The trend-cycle decomposition captures the data’s co-integrating properties without which long-run analysis—whether scenario analysis or forecasting—would likely be mis-specified. In particular, this approach appears to produce better-behaved posteriors for parameters along decision margins where traditional modeling imposes highly persistent but temporary shocks. The existence of permanent and temporary disturbances along the same margin broadens the scope for counterfactuals.