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Measurement with Some Theory: a New Approach to Evaluate Business Cycle Models (with appendices)

Fabio Canova () and Matthias Paustian

No 511, Working Papers from Barcelona Graduate School of Economics

Abstract: We propose a method to evaluate cyclical models which does not require knowledge of the DGP and the exact specification of the aggregate decision rules. We derive robust restrictions in a class of models; use some to identify structural shocks in the data and others to evaluate the class or contrast sub-models. The approach has good properties, even in small samples and when the likelihood is misspecified. We showhow to sort out the relevance of a certain friction (the presence of rule-of-thumb consumers) in a standard class of models.

Keywords: sign restrictions; shock identification; model validation; misspecification (search for similar items in EconPapers)
JEL-codes: E32 C32 (search for similar items in EconPapers)
Date: 2010-10
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