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The Relationship Between DSGE and VAR Models

In: VAR Models in Macroeconomics – New Developments and Applications: Essays in Honor of Christopher A. Sims

Author

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  • Raffaella Giacomini

Abstract

This article reviews the literature on the econometric relationship between DSGE and VAR models from the point of view of estimation and model validation. The mapping between DSGE and VAR models is broken down into three stages: (1) from DSGE to state-space model; (2) from state-space model to VAR(∞); (3) from VAR(∞) to finite-order VAR. The focus is on discussing what can go wrong at each step of this mapping and on critically highlighting the hidden assumptions. I also point out some open research questions and interesting new research directions in the literature on the econometrics of DSGE models. These include, in no particular order: understanding the effects of log-linearization on estimation and identification; dealing with multiplicity of equilibria; estimating nonlinear DSGE models; incorporating into DSGE models information from atheoretical models and from survey data; adopting flexible modeling approaches that combine the theoretical rigor of DSGE models and the econometric model’s ability to fit the data.

Suggested Citation

  • Raffaella Giacomini, 2013. "The Relationship Between DSGE and VAR Models," Advances in Econometrics, in: VAR Models in Macroeconomics – New Developments and Applications: Essays in Honor of Christopher A. Sims, volume 32, pages 1-25, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:aecozz:s0731-9053(2013)0000031001
    DOI: 10.1108/S0731-9053(2013)0000031001
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    Citations

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    Cited by:

    1. Artur Sharafutdinov, 2023. "Forecasting Russian GDP, Inflation, Interest Rate, and Exchange Rate Using DSGE-VAR Model," Russian Journal of Money and Finance, Bank of Russia, vol. 82(3), pages 62-86, September.

    More about this item

    Keywords

    Invertibility; fundamentalness; linearization; impulse-response function; model evaluation; C18; C52;
    All these keywords.

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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