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Validating Dsge Models With Svars And High-Dimensional Dynamic Factor Models

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  • Lippi, Marco

Abstract

A popular validation procedure for Dynamic Stochastic General Equilibrium (DSGE) models consists in comparing the structural shocks and impulse-response functions obtained by estimation-calibration of the DSGE with those obtained in an Structural Vector Autoregressions (SVAR) identified by means of some of the DSGE restrictions. I show that this practice can be seriously misleading when the variables used in the SVAR contain measurement errors. If this is the case, for generic values of the parameters of the DSGE, the shocks estimated in the SVAR are not “made of” the corresponding structural shocks plus measurement error. Rather, each of the SVAR shocks is contaminated by noncorresponding structural shocks. We argue that High-Dimensional Dynamic Factor Models are free from this drawback and are the natural model to use in validation procedures for DSGEs.

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  • Lippi, Marco, 2023. "Validating Dsge Models With Svars And High-Dimensional Dynamic Factor Models," Econometric Theory, Cambridge University Press, vol. 39(6), pages 1273-1291, December.
    • Handle: RePEc:cup:etheor:v:39:y:2023:i:6:p:1273-1291_7
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