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Checking if the Straitjacket Fits

Adrian Pagan () and Michael R. Wickens

No 14140, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper discusses, and provides new evidence on, the view that "theory, while essential, should be regarded as a flexible framework rather than a straightjacket, because features that the theory abstracts from may be important in practice". It considers how best to assess the empirical performance of tightly specified models such as DSGE models, and loosely specified models such as SVARs. These issues are illustrated using various New Keynesian models. We conclude that the challenge is to incorporate flexibility into the theory in such a way as to be compatible with both the theory and the data.

Keywords: DSGE models; Model testing; SVARs (search for similar items in EconPapers)
JEL-codes: C52 E3 (search for similar items in EconPapers)
Date: 2019-11
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