Working Paper: CEPR ID: DP8364
Authors: Fabio Canova; Matthias Paustian
Abstract: A method to evaluate cyclical models which does not require knowledge of the DGP and the exact specification of the aggregate decision rules is proposed. We derive robust restrictions in a class of models; use some to identify structural shocks in the data and others to evaluate the class or contrast sub-models. The approach has good properties, even in small samples, and when the class of models is misspecified. We show how to sort out the relevance of a certain friction (the presence of rule-of-thumb consumers) in a standard class of models.
Keywords: misspecification; model validation; shock identification; sign restrictions
JEL Codes: C32; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| structural shocks (E32) | economic variables (P42) |
| government spending shocks (E62) | consumption responses (D12) |
| rule-of-thumb consumers (D11) | positive consumption responses (D12) |
| share of non-optimizing consumers (D16) | consumption responses (D12) |
| empirical model misspecification (C50) | conclusions about economic dynamics (D59) |
| methodology (B41) | identification of structural disturbances (C62) |
| methodology (B41) | evaluation of discrepancies between model predictions and observed data (C52) |