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What VAR Tell us about DSGE Models?

In: New Trends in Macroeconomics

Author

Listed:
  • Fabio Canova

    (Universitat Pompeu Fabra
    CEPR, IGIER-Universit Bocconi)

  • Joaquim Pires Pina

    (University Nova of Lisbon)

Abstract

Summary We examine the consequences of extracting structural shocks in VAR models using standard standard inertial restrictions, when the data has been generated by two stochastic dynamic general equilibrium (DSGE) models featuring different types of microfundations and different sources of sluggishness. We find that, in general, misspecification is substantial: short run coefficients often have wrong signs; impulse responses and variance decompositions give misleading representations of the dynamics; inexistent puzzles are created. We show that an omitted variables bias accounts for the results and propose an alternative identification technique which can cope with the inherent underidentification displayed by the DSGE models currently used in macroeconomics.

Suggested Citation

  • Fabio Canova & Joaquim Pires Pina, 2005. "What VAR Tell us about DSGE Models?," Springer Books, in: Claude Diebolt & Catherine Kyrtsou (ed.), New Trends in Macroeconomics, pages 89-123, Springer.
    • Handle: RePEc:spr:sprchp:978-3-540-28556-4_6
    DOI: 10.1007/3-540-28556-3_6
    as

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