Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/152925
Authors: 
Del Negro, Marco
Schorfheide, Frank
Smets, Frank
Wouters, Raf
Year of Publication: 
2005
Series/Report no.: 
ECB Working Paper 491
Abstract: 
The paper provides new tools for the evaluation of DSGE models, and applies it to a large-scale New Keynesian dynamic stochastic general equilibrium (DSGE) model with price and wage stickiness and capital accumulation. Specifically, we approximate the DSGE model by a vector autoregression (VAR), and then systematically relax the implied cross-equation restrictions. Let ? denote the extent to which the restrictions are being relaxed. We document how the in- and out-of sample fit of the resulting specification (DSGE-VAR) changes as a function of ?. Furthermore, we learn about the precise nature of the misspecification by comparing the DSGE model’s impulse responses to structural shocks with those of the best-fitting DSGE-VAR. We find that the degree of misspecification in large-scale DSGE models is no longer so large to prevent their use in day-to-day policy analysis, yet it is not small enough that it cannot be ignored.
Subjects: 
Bayesian Analysis
DSGE Models
model evaluation
vector autoregressions
JEL: 
C11
C32
C53
Document Type: 
Working Paper

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