IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/14140.html
   My bibliography  Save this paper

Checking if the Straitjacket Fits

Author

Listed:
  • Wickens, Michael R.
  • Pagan, Adrian

Abstract

This paper discusses, and provides new evidence on, the view that "theory, while essential, should be regarded as a flexible framework rather than a straightjacket, because features that the theory abstracts from may be important in practice". It considers how best to assess the empirical performance of tightly specified models such as DSGE models, and loosely specified models such as SVARs. These issues are illustrated using various New Keynesian models. We conclude that the challenge is to incorporate flexibility into the theory in such a way as to be compatible with both the theory and the data.

Suggested Citation

  • Wickens, Michael R. & Pagan, Adrian, 2019. "Checking if the Straitjacket Fits," CEPR Discussion Papers 14140, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14140
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP14140
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Michal Andrle & Mr. Jaromir Benes, 2013. "System Priors: Formulating Priors about DSGE Models' Properties," IMF Working Papers 2013/257, International Monetary Fund.
    2. Canova, Fabio, 1994. "Statistical Inference in Calibrated Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 9(S), pages 123-144, Suppl. De.
    3. Fabio Canova & Filippo Ferroni, 2022. "Mind the Gap! Stylized Dynamic Facts and Structural Models," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(4), pages 104-135, October.
    4. Christiano, Lawrence J. & Trabandt, Mathias & Walentin, Karl, 2011. "Introducing financial frictions and unemployment into a small open economy model," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 1999-2041.
    5. Hashem M. Pesaran & Ron P. Smith, 2011. "Beyond the DSGE Straitjacket," CESifo Working Paper Series 3447, CESifo.
    6. Gary Koop & M. Hashem Pesaran & Ron P. Smith, 2013. "On Identification of Bayesian DSGE Models," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 31(3), pages 300-314, July.
    7. Ravenna, Federico, 2007. "Vector autoregressions and reduced form representations of DSGE models," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2048-2064, October.
    8. Warne, Anders & Coenen, Günter & Christoffel, Kai, 2008. "The new area-wide model of the euro area: a micro-founded open-economy model for forecasting and policy analysis," Working Paper Series 944, European Central Bank.
    9. Xianglong Liu & Adrian R. Pagan & Tim Robinson, 2018. "Critically Assessing Estimated DSGE Models: A Case Study of a Multi‐sector Model," The Economic Record, The Economic Society of Australia, vol. 94(307), pages 349-371, December.
    10. Del Negro, Marco & Schorfheide, Frank, 2008. "Forming priors for DSGE models (and how it affects the assessment of nominal rigidities)," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1191-1208, October.
    11. M. Hashem Pesaran & Ron P. Smith, 2011. "BEYOND THE DSGE STRAITJACKET-super-1," Manchester School, University of Manchester, vol. 79(s2), pages 5-16, September.
    12. Holston, Kathryn & Laubach, Thomas & Williams, John C., 2017. "Measuring the natural rate of interest: International trends and determinants," Journal of International Economics, Elsevier, vol. 108(S1), pages 59-75.
    13. Daniel M. Rees & Penelope Smith & Jamie Hall, 2016. "A Multi-sector Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 92(298), pages 374-408, September.
    14. Peter N. Ireland, 2004. "Technology Shocks in the New Keynesian Model," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 923-936, November.
    15. Den Haan, Wouter J. & Drechsel, Thomas, 2021. "Agnostic Structural Disturbances (ASDs): Detecting and reducing misspecification in empirical macroeconomic models," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 258-277.
    16. Adrian Pagan & Tim Robinson, 2019. "Implications of Partial Information for Applied Macroeconomic Modelling," Melbourne Institute Working Paper Series wp2019n12, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    17. Chris Woolston, 2014. "Rice," Nature, Nature, vol. 514(7524), pages 49-49, October.
    18. David Meenagh & Patrick Minford & Michael Wickens & Yongdeng Xu, 2019. "Testing DSGE Models by Indirect Inference: a Survey of Recent Findings," Open Economies Review, Springer, vol. 30(3), pages 593-620, July.
    19. Pagan, Adrian & Robinson, Tim, 2014. "Methods for assessing the impact of financial effects on business cycles in macroeconometric models," Journal of Macroeconomics, Elsevier, vol. 41(C), pages 94-106.
    20. Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2014. "Risk Shocks," American Economic Review, American Economic Association, vol. 104(1), pages 27-65, January.
    21. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    22. Binder,M. & Pesaran,H.M., 1995. "Multivariate Rational Expectations Models and Macroeconomic Modelling: A Review and Some New Results," Cambridge Working Papers in Economics 9415, Faculty of Economics, University of Cambridge.
    23. D. S. Poskitt & Wenying Yao, 2017. "Vector Autoregressions and Macroeconomic Modeling: An Error Taxonomy," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 35(3), pages 407-419, July.
    24. Coenen, Günter & Karadi, Peter & Schmidt, Sebastian & Warne, Anders, 2018. "The New Area-Wide Model II: an extended version of the ECB’s micro-founded model for forecasting and policy analysis with a financial sector," Working Paper Series 2200, European Central Bank.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Daniel Buncic, 2020. "Econometric issues with Laubach and Williams' estimates of the natural rate of interest," Papers 2002.11583, arXiv.org, revised Aug 2020.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Coenen, Günter & Karadi, Peter & Schmidt, Sebastian & Warne, Anders, 2018. "The New Area-Wide Model II: an extended version of the ECB’s micro-founded model for forecasting and policy analysis with a financial sector," Working Paper Series 2200, European Central Bank.
    2. Corbo, Vesna & Strid, Ingvar, 2020. "MAJA: A two-region DSGE model for Sweden and its main trading partners," Working Paper Series 391, Sveriges Riksbank (Central Bank of Sweden).
    3. Fernández-Villaverde, J. & Rubio-Ramírez, J.F. & Schorfheide, F., 2016. "Solution and Estimation Methods for DSGE Models," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 527-724, Elsevier.
    4. Pagan, Adrian & Robinson, Tim, 2022. "Excess shocks can limit the economic interpretation," European Economic Review, Elsevier, vol. 145(C).
    5. Kamber, Gunes & McDonald, Chris & Sander, Nick & Theodoridis, Konstantinos, 2016. "Modelling the business cycle of a small open economy: The Reserve Bank of New Zealand's DSGE model," Economic Modelling, Elsevier, vol. 59(C), pages 546-569.
    6. Rodríguez, Aldo, 2020. "Estimación Bayesiana de un Modelo de Economía Abierta con Sector Bancario," Dynare Working Papers 52, CEPREMAP.
    7. Georgiadis, Georgios & Jančoková, Martina, 2020. "Financial globalisation, monetary policy spillovers and macro-modelling: Tales from 1001 shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 121(C).
    8. Xianglong Liu & Adrian R. Pagan & Tim Robinson, 2018. "Critically Assessing Estimated DSGE Models: A Case Study of a Multi‐sector Model," The Economic Record, The Economic Society of Australia, vol. 94(307), pages 349-371, December.
    9. Raffaella Giacomini, 2013. "The relationship between DSGE and VAR models," CeMMAP working papers CWP21/13, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    10. Mariano Kulish & James Morley & Tim Robinson, 2014. "Estimating the expected duration of the zero lower bound in DSGE models with forward guidance," Discussion Papers 2014-32, School of Economics, The University of New South Wales.
    11. Christoph Görtz & John D. Tsoukalas & Francesco Zanetti, 2022. "News Shocks under Financial Frictions," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(4), pages 210-243, October.
    12. Neri, Stefano & Gerali, Andrea, 2019. "Natural rates across the Atlantic," Journal of Macroeconomics, Elsevier, vol. 62(C).
    13. de Groot, Oliver & Haas, Alexander, 2023. "The signalling channel of negative interest rates," Journal of Monetary Economics, Elsevier, vol. 138(C), pages 87-103.
    14. Guido Ascari & Qazi Haque & Leandro M. Magnusson & Sophocles Mavroeidis, 2021. "Empirical evidence on the Euler equation for investment in the US," Papers 2107.08713, arXiv.org, revised Aug 2022.
    15. Thore Kockerols & Erling Motzfeldt Kravik & Yasin Mimir, 2021. "Leaning against persistent financial cycles with occasional crises," Working Paper 2021/11, Norges Bank.
    16. Adrian Pagan & Tim Robinson, 2019. "Implications of Partial Information for Applied Macroeconomic Modelling," Melbourne Institute Working Paper Series wp2019n12, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    17. Hoffmann, Mathias & Kliem, Martin & Krause, Michael & Moyen, Stéphane & Šauer, Radek, 2021. "Rebalancing the euro area: Is wage adjustment in Germany the answer?," Journal of International Money and Finance, Elsevier, vol. 119(C).
    18. Liu, Zheng & Miao, Jianjun & Zha, Tao, 2016. "Land prices and unemployment," Journal of Monetary Economics, Elsevier, vol. 80(C), pages 86-105.
    19. Bańbura, Marta & Albani, Maria & Ambrocio, Gene & Bursian, Dirk & Buss, Ginters & de Winter, Jasper & Gavura, Miroslav & Giordano, Claire & Júlio, Paulo & Le Roux, Julien & Lozej, Matija & Malthe-Thag, 2018. "Business investment in EU countries," Occasional Paper Series 215, European Central Bank.
    20. Zhang, Yahong, 2018. "Financial factors and labor market fluctuations," Economic Modelling, Elsevier, vol. 74(C), pages 24-44.

    More about this item

    Keywords

    Model testing; Dsge models; Svars;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:14140. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.