General Equilibrium Restrictions for Dynamic Factor Models

David de Antonio Liedo

No 1012, Working Papers from Banco de España

Abstract: This paper proposes the use of dynamic factor models as an alternative to the VAR-based tools for the empirical validation of dynamic stochastic general equilibrium (DSGE) theories. Along the lines of Giannone et al. (2006), we use the state-space parameterisation of the factor models proposed by Forni et al. (2007) as a competitive benchmark that is able to capture weak statistical restrictions that DSGE models impose on the data. Beyond the weak restrictions, which are given by the number of shocks and the number of state variables, the behavioural restrictions embedded in the utility and production functions of the model economy contribute to achieve further parsimony. Such parsimony reduces the number of parameters to be estimated, potentially helping the general equilibrium environment improve forecast accuracy. In turn, the DSGE model is considered to be misspecified when it is outperformed by the state-space representation that only incorporates the weak restrictions.

Keywords: dynamic and static rank; factor models; DSGE models; forecasting (search for similar items in EconPapers)
JEL-codes: C52 E32 E37 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2010-04
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ecm, nep-for and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1012

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