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Economic theories and macroeconomic reality

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  • Loria, Francesca
  • Matthes, Christian
  • Wang, Mu-Chun

Abstract

Economic theories are often encoded in equilibrium models that cannot be directly estimated because they lack features that, while inessential to the theoretical mechanism that is central to the specific theory, would be essential to fit the data well. We propose an econometric approach that confronts such theories with data through the lens of a time series model that is a good description of macroeconomic reality. Our approach explicitly acknowledges misspecification as well as measurement error. We highlight in two applications that household heterogeneity greatly helps to fit aggregate data, independently of whether or not nominal rigidities are considered.

Suggested Citation

  • Loria, Francesca & Matthes, Christian & Wang, Mu-Chun, 2022. "Economic theories and macroeconomic reality," Journal of Monetary Economics, Elsevier, vol. 126(C), pages 105-117.
    • Handle: RePEc:eee:moneco:v:126:y:2022:i:c:p:105-117
    DOI: 10.1016/j.jmoneco.2021.12.001
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    Cited by:

    1. KANO, Takashi, 2023. "Posterior Inferences on Incomplete Structural Models : The Minimal Econometric Interpretation," Discussion paper series HIAS-E-128, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
    2. Joshua Chan & Eric Eisenstat & Xuewen Yu, 2022. "Large Bayesian VARs with Factor Stochastic Volatility: Identification, Order Invariance and Structural Analysis," Papers 2207.03988, arXiv.org.
    3. Joshua C. C. Chan, 2022. "Asymmetric conjugate priors for large Bayesian VARs," Quantitative Economics, Econometric Society, vol. 13(3), pages 1145-1169, July.
    4. Knut Are Aastveit & Jamie L. Cross & Francesco Furlanetto & Herman K. Van Dijk, 2024. "Taylor Rules with Endogenous Regimes," Working Papers No 04/2024, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.

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    More about this item

    Keywords

    Bayesian inference; Misspecification; Heterogeneity; VAR; DSGE;
    All these keywords.

    JEL classification:

    • 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
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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