What VAR Tell us about DSGE Models?

Fabio Canova () and Joaquim Pina
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Fabio Canova: Universitat Pompeu Fabra

A chapter in New Trends in Macroeconomics, 2005, pp 89-123 from Springer

Abstract: Summary We examine the consequences of extracting structural shocks in VAR models using standard standard inertial restrictions, when the data has been generated by two stochastic dynamic general equilibrium (DSGE) models featuring different types of microfundations and different sources of sluggishness. We find that, in general, misspecification is substantial: short run coefficients often have wrong signs; impulse responses and variance decompositions give misleading representations of the dynamics; inexistent puzzles are created. We show that an omitted variables bias accounts for the results and propose an alternative identification technique which can cope with the inherent underidentification displayed by the DSGE models currently used in macroeconomics.

Keywords: General equilibrium; Monetary Policy; Identification; Structural VARs (search for similar items in EconPapers)
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-540-28556-4_6

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DOI: 10.1007/3-540-28556-3_6

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