Inference in dynamic stochastic general equilibrium models with possible weak identification

Zhongjun Qu

Quantitative Economics, 2014, vol. 5, 457-494

Abstract: This paper considers inference in log‐linearized dynamic stochastic general equilibrium (DSGE) models with weakly (including un‐) identified parameters. The framework allows for analysis using only part of the spectrum, say at the business cycle frequencies. First, we characterize weak identification from a frequency domain perspective and propose a score test for the structural parameter vector based on the frequency domain approximation to the Gaussian likelihood. The construction heavily exploits the structures of the DSGE solution, the score function, and the information matrix. In particular, we show that the test statistic can be represented as the explained sum of squares from a complex‐valued Gauss–Newton regression, where weak identification surfaces as (imperfect) multicollinearity. Second, we prove that asymptotically valid confidence sets can be obtained by inverting this test statistic and using chi‐squared critical values. Third, we provide procedures to construct uniform confidence bands for the impulse response function, the time path of the variance decomposition, the individual spectrum, and the absolute coherency. Finally, a simulation experiment suggests that the test has adequate size even with relatively small sample sizes. It also suggests it is possible to have informative confidence sets in DSGE models with unidentified parameters, particularly regarding the impulse response functions. Although the paper focuses on DSGE models, the methods are applicable to other dynamic models with well defined spectra, such as stationary (factor‐augmented) vector autoregressions.

Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (22)

Downloads: (external link)
http://hdl.handle.net/10.1111/quan.2014.5.issue-2.x

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:quante:v:5:y:2014:i::p:457-494

Ordering information: This journal article can be ordered from
https://www.econometricsociety.org/membership

Access Statistics for this article

More articles in Quantitative Economics from Econometric Society Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().