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Back to Square One: Identification Issues in DSGE Models

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Listed author(s):
  • Fabio Canova
  • Luca Sala

Abstract

We investigate identifiability issues in DSGE models and their consequences for parameter estimation and model evaluation when the objective function measures the distance between estimated and model impulse responses. We show that observational equivalence, partial and weak identification problems are widespread,that they lead to biased estimates, unreliable t-statistics and may induce investigators to select false models. We examine whether different objective functions affect identification and study how small samples interact with parameters and shock identification. We provide diagnostics and tests to detect identification failures and apply them to a state-of-the-art model.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 303.

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Date of creation: 2006
Handle: RePEc:igi:igierp:303
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Find related papers by JEL classification:
  • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
  • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
  • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
  • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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