Working Paper: CEPR ID: DP3442
Authors: Fabio Canova
Abstract: 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.
Keywords: Dynamic General Equilibrium Models; Model Evaluation; Sign Restrictions; VARs
JEL Codes: E00; E50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| robust restrictions derived from DSGE models (E13) | mismatch with actual economic behavior (E19) |
| limited participation model (C24) | struggles to replicate labor productivity responses (J89) |
| sticky price model (C54) | fails to match dynamic shape of term structure (C69) |
| magnitude of output responses to monetary disturbances (E19) | smaller than found in data (C55) |
| dynamics in response to certain shocks (E32) | vary with dataset used (C29) |
| both models (C59) | produce similar implications for policy rules (C54) |
| dynamics of both models (C69) | qualitatively inconsistent with empirical observations (C59) |