Title: Bayesian Estimation of a Proto-type DSGE Model for Mexico

Abstract:

Over the past two decades, small open economy New Keynesian dynamic stochastic general equilibrium (DSGE) models have emerged as fundamental tools for policy analysis and forecasting. Drawing from existing literature, this study endeavors to construct a prototype model tailored for Mexico. The Mexican experience is compelling, demonstrating the transformation of an emerging market economy by reducing inflation from around 52 percent in 1995 to just under 4 percent by 2003. The paper adapts key elements from Monacelli (2005) and incorporates the Taylor rule. The model parameters are then estimated through Bayesian methods. Initially, the model undergoes simulation by parameter calibration. Subsequently, the simulated data informs the Bayesian inference process for parameter estimation. Following this, parameter estimation is conducted using actual data from Mexico. The results of estimation reveal that most of the estimated parameters align with economic plausibility. Moreover, this research aims to investigate the model’s fore- casting capacity for Mexico’s macroeconomic indicators, including GDP and inflation.