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Local Identification in DSGE Models

  • Nikolay Iskrev

The issue of parameter identification arises whenever structural models are estimated. This paper develops a simple condition for local identification in linearized DSGE models. The condition is necessary and sufficient for identification with likelihood-based methods under normality, or with limited information methods that utilize only second moments of the data. Using the methodology developed in the paper researchers can answer, prior to estimation, the following questions: which parameters are locally identified and which are not; is the identification failure due to data limitations, such as a lack of observations for some variables, or is it intrinsic to the structure of the model.

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Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w200907.

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Date of creation: 2009
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Handle: RePEc:ptu:wpaper:w200907
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  1. Rothenberg, Thomas J, 1971. "Identification in Parametric Models," Econometrica, Econometric Society, vol. 39(3), pages 577-91, May.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  3. Bekker, Paul A. & Pollock, D. S. G., 1986. "Identification of linear stochastic models with covariance restrictions," Journal of Econometrics, Elsevier, vol. 31(2), pages 179-208, March.
  4. Iskrev, Nikolay, 2008. "Evaluating the information matrix in linearized DSGE models," Economics Letters, Elsevier, vol. 99(3), pages 607-610, June.
  5. Nikolay Iskrev, 2010. "Evaluating the strength of identification in DSGE models. An a priori approach," 2010 Meeting Papers 1117, Society for Economic Dynamics.
  6. Frank Schorfheide & Marco Del Negro, 2007. "Forming Priors for DSGE Models (and How It Affects the Assessment of Nominal Rigidities)," 2007 Meeting Papers 283, Society for Economic Dynamics.
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  10. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  11. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
  12. Gary Anderson, 2008. "Solving Linear Rational Expectations Models: A Horse Race," Computational Economics, Springer;Society for Computational Economics, vol. 31(2), pages 95-113, March.
  13. Kim, Jinill, 2003. "Functional equivalence between intertemporal and multisectoral investment adjustment costs," Journal of Economic Dynamics and Control, Elsevier, vol. 27(4), pages 533-549, February.
  14. Canova, Fabio & Sala, Luca, 2009. "Back to square one: Identification issues in DSGE models," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 431-449, May.
  15. Roger E. A. Farmer & Andreas Beyer, 2004. "On the Indeterminacy of New Keynesian Economics," 2004 Meeting Papers 187, Society for Economic Dynamics.
  16. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Springer;Society for Computational Economics, vol. 20(1-2), pages 1-20, October.
  17. Klein, Paul, 2000. "Using the generalized Schur form to solve a multivariate linear rational expectations model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1405-1423, September.
  18. Frank Smets & Raf Wouters, 2007. "Shocks and Frictions in US Business Cycles : a Bayesian DSGE Approach," Working Paper Research 109, National Bank of Belgium.
  19. Anderson, Gary & Moore, George, 1985. "A linear algebraic procedure for solving linear perfect foresight models," Economics Letters, Elsevier, vol. 17(3), pages 247-252.
  20. A. Shapiro & M. Browne, 1983. "On the investigation of local identifiability: A counterexample," Psychometrika, Springer;The Psychometric Society, vol. 48(2), pages 303-304, June.
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