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Confronting model misspecification in macroeconomics

  • Daniel F. Waggoner
  • Tao Zha

We confront model misspecifications in macroeconomics by proposing an analytic framework for merging multiple models. This framework allows us to address uncertainty about models and parameters simultaneously and trace out the historical periods in which one model dominates other models. We apply the framework to a richly parameterized dynamic stochastic general equilibrium (DSGE) model and a corresponding Bayesian vector autoregressive model. The merged model, fitting the data better than both individual models, substantially alters economic inferences about the DSGE parameters and the implied impulse responses.

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Paper provided by Federal Reserve Bank of Atlanta in its series FRB Atlanta Working Paper with number 2010-18.

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Date of creation: 2010
Date of revision:
Handle: RePEc:fip:fedawp:2010-18
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  1. Zheng Liu & Daniel F. Waggoner & Tao Zha, 2011. "Sources of macroeconomic fluctuations: A regime‐switching DSGE approach," Quantitative Economics, Econometric Society, vol. 2(2), pages 251-301, 07.
  2. David E. Altig & Lawrence J. Christiano & Martin Eichenbaum & Jesper Linde, 2004. "Firm-specific capital, nominal rigidities and the business cycle," Working Paper Series WP-05-01, Federal Reserve Bank of Chicago.
  3. Ben S. Bernanke & Mark Gertler & Mark Watson, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 91-157.
  4. James D. Hamilton & Daniel F. Waggoner & Tao Zha, 2007. "Normalization in Econometrics," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 221-252.
  5. Christopher A. Sims & Daniel F. Waggoner & Tao Zha, 2006. "Methods for inference in large multiple-equation Markov-switching models," FRB Atlanta Working Paper 2006-22, Federal Reserve Bank of Atlanta.
  6. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland.
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  8. Chib, Siddhartha, 1996. "Calculating posterior distributions and modal estimates in Markov mixture models," Journal of Econometrics, Elsevier, vol. 75(1), pages 79-97, November.
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  11. Marco Del Negro & Frank Schorfheide, 2002. "Priors from general equilibrium models for VARs," FRB Atlanta Working Paper 2002-14, Federal Reserve Bank of Atlanta.
  12. Olivier J. Blanchard & Mark W. Watson, 1984. "Are Business Cycles All Alike?," NBER Working Papers 1392, National Bureau of Economic Research, Inc.
  13. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
  14. William A. Brock & Steven N. Durlauf & Kenneth D. West, 2003. "Policy Evaluation in Uncertain Economic Environments," NBER Working Papers 10025, National Bureau of Economic Research, Inc.
  15. Christopher A. Sims & Tao Zha, 1996. "Bayesian methods for dynamic multivariate models," FRB Atlanta Working Paper 96-13, Federal Reserve Bank of Atlanta.
  16. McCulloch, Robert E. & Tsay, Ruey S., 1994. "Bayesian Inference of Trend and Difference-Stationarity," Econometric Theory, Cambridge University Press, vol. 10(3-4), pages 596-608, August.
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  18. John F. Geweke, 1998. "Using simulation methods for Bayesian econometric models: inference, development, and communication," Staff Report 249, Federal Reserve Bank of Minneapolis.
  19. Robert J. Gordon, 1990. "The Measurement of Durable Goods Prices," NBER Books, National Bureau of Economic Research, Inc, number gord90-1, December.
  20. Marco Del Negro & Frank Schorfheide, 2005. "Monetary policy analysis with potentially misspecified models," Working Papers 06-4, Federal Reserve Bank of Philadelphia.
  21. Christopher A. Sims & Tao Zha, 1999. "Error Bands for Impulse Responses," Econometrica, Econometric Society, vol. 67(5), pages 1113-1156, September.
  22. Ingram, Beth F. & Whiteman, Charles H., 1994. "Supplanting the 'Minnesota' prior: Forecasting macroeconomic time series using real business cycle model priors," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 497-510, December.
  23. Cogley, Timothy & Sargent, Thomas J., 2005. "The conquest of U.S. inflation: learning and robustness to model uncertainty," Working Paper Series 0478, European Central Bank.
  24. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Sticky price models of the business cycle: can the contract multiplier solve the persistence problem?," Staff Report 217, Federal Reserve Bank of Minneapolis.
  25. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  26. Geweke, John & Amisano, Gianni, 2009. "Optimal Prediction Pools," Working Paper Series 1017, European Central Bank.
  27. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, June.
  28. Hansen, Lars Peter & Sargent, Thomas J., 2010. "Wanting Robustness in Macroeconomics," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 20, pages 1097-1157 Elsevier.
  29. Christopher A. Sims, 1986. "Are forecasting models usable for policy analysis?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-16.
  30. Lars Peter Hansen & Thomas J. Sargent, 2001. "Acknowledging Misspecification in Macroeconomic Theory," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(3), pages 519-535, July.
  31. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
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