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The Use and Mis-Use of SVARs for Validating DSGE Models

Author

Listed:
  • Paul Levine

    (University of Surrey)

  • Joseph Pearlman

    (City University)

  • Alessio Volpicella

    (University of Surrey)

  • Bo Yang

    (Swansea University)

Abstract

This paper studies the potential ability of an SVAR to match impulse response functions of a well-established estimated DSGE model. We study the invertibility (fundamentalness) problem setting out conditions for the RE solution of a linearized Gaussian NK-DSGE model to be invertible taking into account the information sets of agents. We then estimate an SVAR by generating artificial data from the theoretical model. A measure of approximate invertibility, where information can be imperfect, is constructed. Based on the VAR(1) representation of the DSGE model, we compare three forms of SVAR-identification restrictions; zero, sign and bounds on the forecast error variance, for mapping the reduced form residuals of the empirical model to the structural shocks of interest. Separating out two reasons why SVARs may not recover the impulse responses to structural shocks of the DGP, namely non-invertibility and inappropriate identification restrictions, is then the main objective of the paper.

Suggested Citation

  • Paul Levine & Joseph Pearlman & Alessio Volpicella & Bo Yang, 2022. "The Use and Mis-Use of SVARs for Validating DSGE Models," School of Economics Discussion Papers 0522, School of Economics, University of Surrey.
    • Handle: RePEc:sur:surrec:0522
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    More about this item

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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