EconPapers    
Economics at your fingertips  
 

Estimating the parameters of a small open economy DSGE model: identifiability and inferential validity

Daniel Beltran () and David Draper

No 955, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper estimates the parameters of a stylized dynamic stochastic general equilibrium model using maximum likelihood and Bayesian methods, paying special attention to the issue of weak parameter identification. Given the model and the available data, the posterior estimates of the weakly identified parameters are very sensitive to the choice of priors. We provide a set of tools to diagnose weak identification, which include surface plots of the log-likelihood as a function of two parameters, heat plots of the log-likelihood as a function of three parameters, Monte Carlo simulations using artificial data, and Bayesian estimation using three sets of priors. We find that the policy coefficients and the parameter governing the elasticity of labor supply are weakly identified by the data, and posterior predictive distributions remind us that DSGE models may make poor forecasts even when they fit the data well. Although parameter identification is model- and data-specific, the lack of identification of some key structural parameters in a small-scale DSGE model such as the one we examine should raise a red flag to researchers trying to estimate--and draw valid inferences from--large-scale models featuring many more parameters.

Keywords: Econometric models; Bayesian statistical decision theory; Macroeconomics (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-dge and nep-ecm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22) Track citations by RSS feed

Downloads: (external link)
http://www.federalreserve.gov/pubs/ifdp/2008/955/default.htm (text/html)
http://www.federalreserve.gov/pubs/ifdp/2008/955/ifdp955.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:955

Access Statistics for this paper

More papers in International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().

 
Page updated 2023-01-27
Handle: RePEc:fip:fedgif:955