Matching Theory and Data: Bayesian Vector Autoregression and Dynamic Stochastic General Equilibrium Models

September 27, 2009

By Alexander Kriwolsky

This paper shows how to identify the structural shocks of a Vector Autoregression (VAR) while simultaneously estimating a dynamic stochastic general equilibrium (DSGE) model that is not assumed to replicate the data-generating process. It proposes a framework for estimating the parameters of the VAR model and the DSGE model jointly: the VAR model is identified by sign restrictions derived from the DSGE model; the DSGE model is estimated by matching the corresponding impulse response functions.

Starting with Galí (1999), VAR models have been used to test various predictions of DSGE models, in particular the sources of business cycle fluctuations. The empirical strategy has, however, been put in doubt by a series of recent papers, foremost Chari, Kehoe, McGrattan (2008), Fernández-Villaverde, Rubio-Ramírez, Sargent and Watson (2007) and Christiano, Eichenbaum and Vigfusson (2006).

The paper above goes further. Instead of estimating one model using restrictions from the other, it estimates both the VAR and the DSGE models jointly. Is this the way to end this debate? Does this imply that we get better estimates?

The NEP-DGE Blog

September 26, 2009

This blog is an experiment to explore the feasibility of scientific discussion on an Economics blog. NEP-DGE disseminates every week new working papers in the field of Dynamics General Equilibrium. Among them, the NEP-DGE editor selects one to be discussed. Everyone is invited to comment. Try to stay civil, or your comments will be removed. And encourage others to read or join in the discussion.


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