DSGE Model Restrictions for Structural VAR Identification

36 Pages Posted: 1 Nov 2010

See all articles by Philip Liu

Philip Liu

International Monetary Fund (IMF)

Konstantinos Theodoridis

Cardiff University

Date Written: October 28, 2010

Abstract

The identification of reduced-form VAR model had been the subject of numerous debates in the literature. Different sets of identifying assumptions can lead to very different conclusions in the policy debate. This paper proposes a theoretically consistent identification strategy using restrictions implied by a DSGE model. Monte Carlo simulations suggest the proposed identification strategy is successful in recovering the true structural shocks from the data. In the face of misspecified model restrictions, the data tend to push the identified VAR responses away from the misspecified model and closer to the true data generating process.

Keywords: VAR Identification, Model Misspecification, DSGE Model

JEL Classification: F41, E52

Suggested Citation

Liu, Philip and Theodoridis, Konstantinos, DSGE Model Restrictions for Structural VAR Identification (October 28, 2010). Bank of England Working Paper No. 402, Available at SSRN: https://ssrn.com/abstract=1701140 or http://dx.doi.org/10.2139/ssrn.1701140

Philip Liu

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Konstantinos Theodoridis (Contact Author)

Cardiff University ( email )

Aberconway Building
Colum Drive
Cardiff, Wales CF10 3EU
United Kingdom

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