By Alessia Paccagnini
Dynamic Stochastic General Equilibrium (DSGE) models are the main tool used in Academia and in Central Banks to evaluate the business cycle for policy and forecasting analyses. Despite the recent advances in improving the fit of DSGE models to the data, the misspecification issue still remains. The aim of this survey is to shed light on the different forms of misspecification in DSGE modeling and how the researcher can identify the sources. In addition, some remedies to face with misspecification are discussed.
I have occasionally pointed out on this blog various misspecification issues in the estimation of DSGE models. This handy survey addresses a lot of such worries with some remedies.