DP3442 Validating Monetary DSGE Models through VARs

Author(s): Fabio Canova
Publication Date: July 2002
Keyword(s): dynamic general equilibrium models, model evaluation, sign restrictions, VARs
JEL(s): E00, E50
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3442

Robust sign restrictions derived from calibrated DSGE models are used to identify structual shocks in the actual data. The dynamic behaviour of selected variables in response to these shocks is employed to measure, both qualitatively and quantitatively, the economic discrepancy between the model and the data. We design an algorithm that allows increasingly demanding diagnostics on the model, room for respecification at each stage of the process and comparison across models. We show that neither a limited participation model, nor a sticky price monopolistic-competitive model, fully accounts for the dynamics of a small set of macro variables. Furthermore simple alterations of the former fail to improve the match with the data, even in qualitative sense.