Frequentist Inference in Weakly Identified DSGE Models

42 Pages Posted: 10 Aug 2009 Last revised: 9 Oct 2009

See all articles by Pablo Guerrón-Quintana

Pablo Guerrón-Quintana

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Atsushi Inoue

Southern Methodist University

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: July 30, 2009

Abstract

The authors show that in weakly identified models (1) the posterior mode will not be a consistent estimator of the true parameter vector, (2) the posterior distribution will not be Gaussian even asymptotically, and (3) Bayesian credible sets and frequentist confidence sets will not coincide asymptotically. This means that Bayesian DSGE estimation should not be interpreted merely as a convenient device for obtaining asymptotically valid point estimates and confidence sets from the posterior distribution. As an alternative, the authors develop a new class of frequentist confidence sets for structural DSGE model parameters that remains asymptotically valid regardless of the strength of the identification. The proposed set correctly reflects the uncertainty about the structural parameters even when the likelihood is flat, it protects the researcher from spurious inference, and it is asymptotically invariant to the prior in the case of weak identification.

Keywords: DSGE models, Bayesian estimation, identification, inference, confidence sets, Bayes factor

JEL Classification: C32, C52, E3, E5

Suggested Citation

Guerron-Quintana, Pablo and Inoue, Atsushi and Kilian, Lutz, Frequentist Inference in Weakly Identified DSGE Models (July 30, 2009). FRB of Philadelphia Working Paper No. 09-13. Available at SSRN: https://ssrn.com/abstract=1441965 or http://dx.doi.org/10.2139/ssrn.1441965

Pablo Guerron-Quintana (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Atsushi Inoue

Southern Methodist University ( email )

Dallas, TX 75275
United States

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-764-2320 (Phone)
734-764-2769 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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