Identifying the sources of model misspecification

Atsushi Inoue, Chun-Hung Kuo and Barbara Rossi

Journal of Monetary Economics, 2020, vol. 110, issue C, 1-18

Abstract: Conventional macroeconomic models fail to predict to the Great Recession. Is it because they are misspecified? We propose an empirical method for detecting and identifying misspecification in structural economic models. Our approach formalizes the common practice of adding “shocks” in the model, and identifies potential misspecification via forecast error variance decomposition and marginal likelihood analyses. The simulation results based on a small-scale DSGE model demonstrate that our method can correctly identify the source of misspecification. Our empirical results show that state-of-the-art medium-scale New Keynesian DSGE models remain misspecified, pointing to asset and labor markets as the sources of the misspecification.

Keywords: Misspecification; DSGE models; Forecast error variance decomposition; Marginal likelihood (search for similar items in EconPapers)
JEL-codes: C11 C52 E32 E52 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304393219300029
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Identifying the sources of model misspecification (2018)
Working Paper: Identifying the Sources of Model Misspecification (2015)
Working Paper: Identifying the Sources of Model Misspecification (2014)
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:eee:moneco:v:110:y:2020:i:c:p:1-18

DOI: 10.1016/j.jmoneco.2019.01.003

Access Statistics for this article

Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser

More articles in Journal of Monetary Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().