On the Identification of Diagnostic Expectations: Econometric Insights from DSGE Models

Jinting Guo

Papers from arXiv.org

Abstract: This paper shows that diagnostic expectations (DE) and rational expectations (RE) are not observationally equivalent in dynamic stochastic general equilibrium (DSGE) models. Using the frequency-domain framework of Qu and Tkachenko (2012, 2017), I show that no RE parameterization yields the DE-implied autocovariance structure of the macroeconomic observables considered in either small- or medium-scale DSGE models, even after structural frictions and shock processes are reparameterized. Incorporating DE preserves overall identification but weakens the identification of shock variances. In the medium-scale model, among the frictions, wage rigidity emerges as most important for generating the benchmark DE model dynamics.

Date: 2025-09, Revised 2026-05
New Economics Papers: this item is included in nep-dge and nep-ecm
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