Implications of partial information for econometric modeling of macroeconomic systems
Adrian Pagan () and
Tim Robinson ()
CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University
Representative models of the macroeconomy (RMs), such as DSGE models, frequently contain unobserved variables. A finite-order VAR representation in the observed variables may not exist, and therefore the impulse responses of the RMs and SVAR models may differ. We demonstrate this divergence often is: (i) not substantial; (ii) reflects the omission of stock variables from the VAR; and (iii) when the RM features I (1) variables can be ameliorated by estimating a latent-variable VECM. We show that DSGE models utilize identifying restrictions stemming from common factor dynamics reflecting statistical, not economic, assumptions. We analyze the use of measurement error, and demonstrate that it may result in unintended consequences, particularly in models featuring I (1) variables.
Keywords: SVAR; Partial Information; Identification; Measurement Error; DSGE (search for similar items in EconPapers)
JEL-codes: E37 C51 C52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2019-41
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