DP7234 Back to square one: identification issues in DSGE models

Author(s): Fabio Canova, Luca Sala
Publication Date: March 2009
Keyword(s): DSGE models, Identification, Impulse Responses, small samples.
JEL(s): C10, C52, E32, E50
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7234

We investigate identification issues in DSGE models and their consequences for parameter estimation and model evaluation when the objective function measures the distance between estimated and model-based impulse responses. Observational equivalence, partial and weak identification problems are widespread and typically produced by an ill-behaved mapping between the structural parameters and the coefficients of the solution. Different objective functions affect identification and small samples interact with parameters identification. Diagnostics to detect identification deficiencies are provided and applied to a widely used model.