Working Paper: NBER ID: w17791
Authors: Daniel F. Waggoner; Tao Zha
Abstract: We estimate a Markov-switching mixture of two familiar macroeconomic models: a richly parameterized DSGE model and a corresponding BVAR model. We show that the Markov-switching mixture model dominates both individual models and improves the fit considerably. Our estimation indicates that the DSGE model plays an important role only in the late 1970s and the early 1980s. We show how to use the mixture model as a data filter for estimation of the DSGE model when the BVAR model is not identified. Moreover, we show how to compute the impulse responses to the same type of shock shared by the DSGE and BVAR models when the shock is identified in the BVAR model. Our exercises demonstrate the importance of integrating model uncertainty and parameter uncertainty to address potential model misspecification in macroeconomics.
Keywords: Markov-switching; DSGE model; BVAR model; model misspecification; policy analysis
JEL Codes: C52; E2; E4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Markov-switching mixture model (C32) | Dominates DSGE model (E13) |
| Markov-switching mixture model (C32) | Dominates BVAR model (C29) |
| DSGE model weight (E13) | Important role during late 1970s and early 1980s (E65) |
| BVAR model weight (C51) | Dominates during other periods (E32) |
| Impulse responses to capital depreciation shock (E22) | Larger with Markov-switching mixture model (C59) |
| Monetary policy shock (E39) | Smaller effects when model uncertainty is considered (C59) |
| Model uncertainty (D81) | Alters estimated results of parameters (C51) |