What VARs tell us about DSGE models

Fabio Canova, Joaquim P. Pina

Research output: Chapter in Book/Report/Conference proceedingChapter

19 Citations (Scopus)

Abstract

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.
Original languageEnglish
Title of host publicationNew Trends in Macroeconomics
Place of PublicationBerlin
PublisherSpringer Verlag
Pages89-123
Number of pages36
ISBN (Print)3540214488
DOIs
Publication statusPublished - 1 Jan 2005

Keywords

  • Monetary Policy
  • Structural VARs
  • General equilibrium
  • Identification

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