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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
Date of revision:
Handle: RePEc:ptu:wpaper:w200907
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  1. Roger E. A. Farmer & Andreas Beyer, 2004. "On the Indeterminacy of New Keynesian Economics," 2004 Meeting Papers 187, Society for Economic Dynamics.
  2. Iskrev, Nikolay, 2008. "Evaluating the information matrix in linearized DSGE models," Economics Letters, Elsevier, vol. 99(3), pages 607-610, June.
  3. Marco Del Negro & Frank Schorfheide, 2008. "Forming priors for DSGE models (and how it affects the assessment of nominal rigidities)," Staff Reports 320, Federal Reserve Bank of New York.
  4. 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.
  5. Nikolay Iskrev, 2010. "Evaluating the strength of identification in DSGE models. An a priori approach," Working Papers w201032, Banco de Portugal, Economics and Research Department.
  6. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Society for Computational Economics, vol. 20(1-2), pages 1-20, October.
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  8. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
  9. 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.
  10. Fabio Canova & Luca Sala, 2006. "Back to Square One: Identification Issues in DSGE Models," Working Papers 303, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  11. Lawrence J. Christiano, 1998. "Solving Dynamic Equilibrium Models by a Method of Undetermined Coefficients," NBER Technical Working Papers 0225, National Bureau of Economic Research, Inc.
  12. Gary S. Anderson, 2006. "Solving linear rational expectations models: a horse race," Finance and Economics Discussion Series 2006-26, Board of Governors of the Federal Reserve System (U.S.).
  13. Rothenberg, Thomas J, 1971. "Identification in Parametric Models," Econometrica, Econometric Society, vol. 39(3), pages 577-91, May.
  14. 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.
  15. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.
  16. Smets, Frank & Wouters, Rafael, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," CEPR Discussion Papers 6112, C.E.P.R. Discussion Papers.
  17. 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.
  18. A. Shapiro & M. Browne, 1983. "On the investigation of local identifiability: A counterexample," Psychometrika, Springer, vol. 48(2), pages 303-304, June.
  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. 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.
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