Working Paper: CEPR ID: DP7234
Authors: Fabio Canova; Luca Sala
Abstract: 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.
Keywords: DSGE Models; Identification; Impulse Responses; Small Samples
JEL Codes: C10; C52; E32; E50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| mapping from structural parameters to coefficients of the solution (C51) | observational equivalence (C90) |
| curvature of the objective function may be small in certain regions of the parameter space (C61) | weak identification (C50) |
| calibrating troublesome parameters (C51) | distorted distribution of estimates (C46) |
| identification deficiencies (L15) | erroneous economic interpretations (E65) |
| identification deficiencies (L15) | misguided policy advice (E65) |