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A note on the identification of dynamic economic models with generalized shock processes

  • Christopher Reicher

DSGE models with generalized shock processes have been a major area of research in recent years. In this paper, I show that the structural parameters governing DSGE models are not identified when the driving process behind the model follows an unrestricted VAR. This finding implies that parameter estimates derived from recent attempts to estimate DSGE models with generalized driving processes should be treated with caution, and that there exists a tradeoff between identification and the risk of model misspecification

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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1821.

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Length: 10 pages
Date of creation: Jan 2013
Date of revision:
Handle: RePEc:kie:kieliw:1821
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  1. Marco Del Negro & Frank Schorfheide, 2008. "Monetary policy analysis with potentially misspecified models," Staff Reports 321, Federal Reserve Bank of New York.
  2. Marco Del Negro & Frank Schorfheide, 2002. "Priors from general equilibrium models for VARs," FRB Atlanta Working Paper 2002-14, Federal Reserve Bank of Atlanta.
  3. Peter Ireland, 1999. "A Method for Taking Models to the Data," Computing in Economics and Finance 1999 1233, Society for Computational Economics.
  4. Frank Smets & Raf Wouters, 2007. "Shocks and Frictions in US Business Cycles : a Bayesian DSGE Approach," Working Paper Research 109, National Bank of Belgium.
  5. V V Chari & Patrick J Kehoe & Ellen R. McGrattan, 2003. "Business Cycle Accounting," Levine's Bibliography 506439000000000421, UCLA Department of Economics.
  6. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  7. Ravenna, Federico, 2007. "Vector autoregressions and reduced form representations of DSGE models," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2048-2064, October.
  8. Agostino Consolo & Carlo A. Favero & Alessia Paccagnini, 2007. "On the Statistical Identification of DSGE Models," Working Papers 324, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  9. Nikolay Iskrev, 2009. "Local Identification in DSGE Models," Working Papers w200907, Banco de Portugal, Economics and Research Department.
  10. Ivana Komunjer & Serena Ng, 2011. "Dynamic Identification of Dynamic Stochastic General Equilibrium Models," Econometrica, Econometric Society, vol. 79(6), pages 1995-2032, November.
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