Identifying the sources of model misspecification

Atsushi Inoue, Chun-Hung Kuo and Barbara Rossi

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: In this paper we propose an empirical method for detecting and identifying misspecification in structural economic models. Our approach formalizes the common practice of adding “shocks” in the model, and identifies potential misspecification via forecast error variance decomposition and marginal likelihood analyses. The simulation results based on a small-scale DSGE model demonstrate that our method can correctly identify the source of misspecification. Our empirical results show that state-of-the-art medium-scale New Keynesian DSGE models remain misspecified, pointing to asset and labor markets as the sources of the misspecification.

Keywords: DSGE models; marginal likelihood; misspecification. (search for similar items in EconPapers)
Date: 2015-02, Revised 2018-06
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Identifying the sources of model misspecification (2020)
Working Paper: Identifying the Sources of Model Misspecification (2015)
Working Paper: Identifying the Sources of Model Misspecification (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1479

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