Confronting Model Misspecification in Macroeconomics

Daniel Waggoner and Tao Zha

No 17791, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We estimate a Markov-switching mixture of two familiar macroeconomic models: a richly parameterized DSGE model and a corresponding BVAR model. We show that the Markov-switching mixture model dominates both individual models and improves the fit considerably. Our estimation indicates that the DSGE model plays an important role only in the late 1970s and the early 1980s. We show how to use the mixture model as a data filter for estimation of the DSGE model when the BVAR model is not identified. Moreover, we show how to compute the impulse responses to the same type of shock shared by the DSGE and BVAR models when the shock is identified in the BVAR model. Our exercises demonstrate the importance of integrating model uncertainty and parameter uncertainty to address potential model misspecification in macroeconomics.

JEL-codes: C52 E2 E4 (search for similar items in EconPapers)
Date: 2012-01
New Economics Papers: this item is included in nep-cba and nep-dge
Note: EFG ME
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Citations: View citations in EconPapers (74)

Published as Waggoner, Daniel F. & Zha, Tao, 2012. "Confronting model misspecification in macroeconomics," Journal of Econometrics, Elsevier, vol. 171(2), pages 167-184.

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Journal Article: Confronting model misspecification in macroeconomics (2012)
Working Paper: Confronting model misspecification in macroeconomics (2010)
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