DSGE Model Validation in a Bayesian Framework: an Assessment

Paccagnini, Alessia (2010): DSGE Model Validation in a Bayesian Framework: an Assessment.

Abstract

This paper presents the concept of Model Validation applied to a Dynamic Stochastic General equilibrium Model (DSGE). The main problem discussed is the approximation of the statistical representation for a DSGE model when not all endogenous variables are observable. MonteCarlo experiments in artificial world are implemented to assess this problem by using the DSGE-VAR. Two Data Generating Processes are compared: a forward-looking and a backward-looking model. These experiments are followed by an empirical analysis with real world data for the US economy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Bayesian Analysis, DSGE Models, Vector Autoregressions, MonteCarlo experiments
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C15 - Statistical Simulation Methods: General; C - Mathematical and Quantitative Methods > C0 - General > C01 - Econometrics; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C11 - Bayesian Analysis: General

References

Adolfson Malin, Stefan Laséen, Jesper Lindé and Mattias Villani (2008): "Evaluating an Estimated New Keynesian Small Open Economy Model", Journal of Economic Dynamics and Control Elsevier, vol. 32(8), pages 2690-2721.

Altug, Sumru (1989): "Time-to-build and Aggregate Fluctuations: Some New Evidence", International Economic Review, 30 (4), pp. 889-920.

Canova, Fabio (1994): "Statistical Inference in Calibrated Models", Journal of Applied Econometrics, 9, S123-S144.

Canova, Fabio (1995): "Sensitivity Analysis and Model Evaluation in Simulated Dynamic General Equilibrium Economies", International Economic Review, 36, 477-501.

Canova, Fabio (2005): "Methods for Applied Macroeconomic Research ", Princeton University Press, Princeton.

Canova, Fabio and Sala, Luca (2009): "Back to Square One: Identification issues in DSGE models", Journal of Monetary Economics, vol. 56(4), pages 431-449.

Cecchetti, Stephen G., Pok-Sang Lam and Nelson C. Mark (1993): "The Equity Premium and the Risk-Free Rate : Matching the Moments", Journal of Monetary Economics, vol. 31(1), pages 21-45.

Chari, V.V., Patrick Kehoe and Ellen R. McGrattan (2005): " A Critique of Structural VARs Using Real Business Cycle Theory", Federal Reserve Bank of Minneapolis, Working Paper 631.

Christiano, Lawrence J. and Martin Eichenbaum (1992): "Current Real Business Cycle Theories and Aggregate labor Market Fluctuation", American Economic Review, 82, 430-450.

Christiano, Lawrence J., Martin Eichenbaum and Robert Vigfusson (2006): "Assessing Structural VARs", in: Acemoglu, D., Rogoff, K. and Woodford, M. (Eds.), NBER Macroeconomics Annual 2006, Cambridge: The MIT Press.

Clarida, Richard, Jordi Galì and Mark Gertler (2000): "Monetary Policy Rules and Macroeconomics Stability: Evidence and some Theory", Quarterly Journal of Economics, 115, pp 147-180.

Consolo, Agostino, Carlo A. Favero and Alessia Paccagnini (2009): "On the Statistical Identification of DSGE Models", Journal of Econometrics, 150, 99-115.

Cogley, Timothy and James M. Nason (1994): "Testing the Implications of Long-Run Neutrality for Monetary Business Cycle Models," Journal of Applied Econometrics, vol. 9(S), pages S37-70, Suppl. De.

Cooley, Thomas F and Mark Dwyer (1998): "Business Cycle Analysis Without Much Theory. A Look at Structural VARs", Journal of Econometrics 83(1-2), 57-88.

Diebold, Francis, Lee Ohanian and Jeremy Berkowitz (1998): "Dynamic Equilibrium Economies: A Framework for Comparing Models and Data", Review of Economic Studies, 65, 433-452.

Doan, Thomas, Robert Litterman and Christopher Sims (1984): "Forecasting and Conditional Projections Using Realistic Prior Distributions", Econometric Reviews, 3, pp 1-100.

DeJong, David, Beth Ingram and Charles Whiteman (1996):"A Bayesian Approach to Calibration", Journal of Business Economics and Statistics, 14, pp 1-9.

DeJong, David, Beth Ingram and Charles Whiteman (2000): "A Bayesian Approach to Dynamic Macroeconomics", Journal of Econometrics, 98, pp 203-223.

Del Negro, Marco and Frank Schorfheide (2004): "Priors from General equilibrium Models for VARs", International Economic Review, 45, pp 643-673.

Del Negro, Marco and Frank Schorfheide (2006): "How Good Is What You've Got? DSGE-VAR as a Toolkit for Evaluating DSGE Models", Federal Reserve Bank of Atlanta Economic Review 91, Second Quarter 2006.

Del Negro, Marco, Frank Schorfheide, Frank Smets and Raf Wouters (2007a): "On the Fit of New-Keynesian Models", Journal of Business and Economic Statistics, Volume 25, Number 2 April 2007, pp123-143 .

Del Negro, Marco, Frank Schorfheide, Frank Smets and Raf Wouters (2007b): "On the Fit of New-Keynesian Models: Rejoinder", Journal of Business and Economic Statistics, Volume 25, Number 2 April 2007, pp159-162 .

Fève, Patrick and Francois Langot (1994): "The RBC Models Through Statistical Inference: An Application with French Data", Journal of Applied Econometrics, 9, S11-S37.

Fernandez-Villaverde, Jesus, Juan Francisco Rubio-Ramirez , Thomas Sargent and Mark Watson (2007): "A, B, C's (and D's) for understanding VARs", the American Economic Review, 97, 3, pp 1021--1026.

Frisch, Ragnar (1933): "Propagation Problems and Impulse Problems in Dynamics Economies ", in Economic Essays in Honor of Gustav Cassel, London.

Geweke, John (1989): "Bayesian Inference in Econometric Models using MonteCarlo Integration", Econometrics, 57, 1317-1339.

Gregory, Allan W. and Gregory Smith (1991): "Calibration as Testing: Inference in Simulated Macro Models", Journal of Business and Economic Statistics, 9, 293-303.

Haavelmo, Trigve (1944): "The Probability Approach in Econometrics ", Econometrica, 12, Supplement.

Ingram, Beth and Charles Whiteman (1994): "Supplanting the Minnesota Prior - Forecasting Macroeconomics Time Series using Real Business Cycle Model Priors", Journal of Monetary Economics, 34,pp 497-510.

Ireland, Peter (2004): "A Method for Taking Models to the Data", Journal of Economic Dynamics and Control, 28, pp 1205-1226.

Iskrev, Nikolay (2010): "Local identification in DSGE models", Journal of Monetary Economics, vol. 57(2), pages 189-202.

King, Robert G., Charles I. Plosser and Sergio T. Rebelo (1988): "Production, Growth and Business Cycles", Journal of Monetary Economics, 21, pp 195-232.

King, Robert G. (2000): "The New IS-LM Model: Language, Logic, and Limits", Federal Reserve Bank of Richmond Economic Quarterly, 86, pp 45-103.

Komunjer, Ivana and Serena Ng (2009a): "Issues in the Static Identification of DSGE Models", mimeo.

Komunjer, Ivana and Serena Ng (2009b): "Dynamic Identification of DSGE Models", mimeo.

Kydland, Finn E. and Edward C. Prescott (1982): "Time to build and aggregate fluctuations", Econometrica, 50: 1345-13.

Lindé, Jesper (2001): "The Empirical Relevance of Simple Forward- and Backward-Looking Models: A View from a Dynamic General Equilibrium Model", Sveriges Riksbank Working Paper Series, December 2001, No 130.

Litterman, Robert B. (1981): "A Bayesian Procedure for Forecasting with Vector Autoregressions", Working Paper, Federal Reserve Bank of Minneapolis.

Maffezzoli, Marco (2000): "Human Capital and International Business Cycle ", Review of Economic Dynamics, 3, 137-165.

Ravenna, Federico (2007): "Vector Autoregressions and Reduced Form Representations of DSGE Models", Journal of Monetary Economics, 54, pp. 2048-2064.

Rudebusch, Glenn D.R. and Lars E.O. Svensson (1998): "Policy rules for Inflation Targeting,", NBER Working Paper 6512.

Sargent, Thomas (1989): "Two Models of Measurements and the Investment Accelerator", Journal of Political Economy, 97 (2), pp. 251-287.

Schorfheide, Frank (2000): "Loss function-based evaluation of DSGE models", Journal of Applied Econometrics, 15 (6), pp. 645-670.

Sims, Christopher A. (1980): "Macroeconomics and Reality", Econometrica, 48: pp 1-48.

Sims, Christopher A. (1996): "Macroeconomics and Methodology", Journal of Economic Perspectives, 10, Winter 1996, 105-120.

Sims, Chistopher. A. (2002): "Solving Linear Rational Expectations Models", Computational Economics, 20 (1-2), pp 1-20.

Sims, Christopher A. (2005): "Dummy Observation Priors Revisited", Manuscript, Princeton University.

Sims, Christopher A. (2007): "On the Fit of New-Keynesian Models: Comment", Journal of Business and Economic Statistics, Volume 25, Number 2 April 2007.

Smets, Frank and Raf Wouters (2003): "An Estimated Stochastic Dynamic General Equilibrium Model of the Euro Area", Journal of the European Economic Association, 1, pp 1123-75.

Soderlind, Paul (1994): "Cyclical Properties of a Real Business Cycle Model ", Journal of Applied Econometrics, 9, S113-S122.

Svensson, Lars E.O. (1997): "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets", European Economic Review, Vol.41, No. 6, pp. pp 1111-1146.

Theil Henry and Goldberg Arthur S (1961): "On Pure and Mixed Estimation in Economics", International Economic Review, 2, pp 65-78.

Watson, Mark (1993): "Measures of Fit for Calibrated Models", Journal off Political Economy, 101, 1011-1041. Woodford, Michael (2003): "Interest and Prices", Princeton University Press.