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Limited Information Estimation and Evaluation of DSGE Models. Working paper #6

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  • Martin Fukac
  • Adrian Pagan

    (National Centre for Econometric Research)

Abstract

We advance the proposal that DSGE models should not just be estimated and evaluated with reference to full information methods. These make strong assumptions and therefore there is uncertainty about their impact upon results. Some limited information analysis which can be used in a complementary way seems important. Because it is sometimes difficult to implement limited information methods when there are unobservable non-stationary variables in the system we present a simple method of overcoming this that involves normalizing the non-stationary variables with their permanent components and then estimating the estimating the resulting Euler equations. We illustrate the interaction between full and limited information methods in the context of a well-known open economy model of Lubik and Schorfheide. The transformation was effective in revealing possible mis-specifications in the equations of LS\'s system and the limited information analysis highlighted the role of priors in having a major influence upon the estimates.

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File URL: http://www.ncer.edu.au/papers/documents/WPNo6.pdf
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Bibliographic Info

Paper provided by National Centre for Econometric Research in its series NCER Working Paper Series with number 6.

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Date of creation: 15 Nov 2006
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Publication status: published
Handle: RePEc:qut:auncer:2006-6

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  1. Singleton, Kenneth J., 1988. "Econometric issues in the analysis of equilibrium business cycle models," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 361-386.
  2. 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.
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Cited by:
  1. Luca Fanelli, 2009. "Estimation of quasi-rational DSGE monetary models," Quaderni di Dipartimento 3, Department of Statistics, University of Bologna.
  2. Mardi Dungey & Adrian Pagan, 2008. "Extending an SVAR Model of the Australian Economy," NCER Working Paper Series 21, National Centre for Econometric Research.
  3. Andreas Beyer & Roger E. A. Farmer & Jérôme Henry & Massimiliano Marcellino, 2007. "Factor Analysis in a Model with Rational Expectations," NBER Working Papers 13404, National Bureau of Economic Research, Inc.
  4. Yuriy Gorodnichenko & Serena Ng, 2009. "Estimation of DSGE Models When the Data are Persistent," NBER Working Papers 15187, National Bureau of Economic Research, Inc.
  5. Milani, Fabio, 2009. "Expectations, learning, and the changing relationship between oil prices and the macroeconomy," Energy Economics, Elsevier, vol. 31(6), pages 827-837, November.

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