General Equilibrium Restrictions for Dynamic Factor Models
AbstractThis paper proposes the use of dynamic factor models as an alternative to the VAR-based tools for the empirical validation of dynamic stochastic general equilibrium (DSGE) theories. Along the lines of Giannone et al. (2006), we use the state-space parameterisation of the factor models proposed by Forni et al. (2007) as a competitive benchmark that is able to capture weak statistical restrictions that DSGE models impose on the data. Beyond the weak restrictions, which are given by the number of shocks and the number of state variables, the behavioural restrictions embedded in the utility and production functions of the model economy contribute to achieve further parsimony. Such parsimony reduces the number of parameters to be estimated, potentially helping the general equilibrium environment improve forecast accuracy. In turn, the DSGE model is considered to be misspecified when it is outperformed by the state-space representation that only incorporates the weak restrictions.
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Bibliographic InfoPaper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1012.
Length: 47 pages
Date of creation: Apr 2010
Date of revision:
dynamic and static rank; factor models; DSGE models; forecasting;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-05-02 (All new papers)
- NEP-CBA-2010-05-02 (Central Banking)
- NEP-DGE-2010-05-02 (Dynamic General Equilibrium)
- NEP-ECM-2010-05-02 (Econometrics)
- NEP-FOR-2010-05-02 (Forecasting)
- NEP-MAC-2010-05-02 (Macroeconomics)
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