On Identification of Bayesian DSGE Models

39 Pages Posted: 18 Apr 2011

See all articles by Gary Koop

Gary Koop

University of Strathclyde, Glasgow - Strathclyde Business School - Department of Economics

M. Hashem Pesaran

University of Southern California - Department of Economics; University of Cambridge - Trinity College (Cambridge)

Ron Smith

Birkbeck College

Multiple version iconThere are 2 versions of this paper

Abstract

In recent years there has been increasing concern about the identification of parameters in dynamic stochastic general equilibrium (DSGE) models. Given the structure of DSGE models it may be difficult to determine whether a parameter is identified. For the researcher using Bayesian methods, a lack of identification may not be evident since the posterior of a parameter of interest may differ from its prior even if the parameter is unidentified. We show that this can be the case even if the priors assumed on the structural parameters are independent. We suggest two Bayesian identification indicators that do not suffer from this difficulty and are relatively easy to compute. The first applies to DSGE models where the parameters can be partitioned into those that are known to be identified and the rest where it is not known whether they are identified. In such cases the marginal posterior of an unidentified parameter will equal the posterior expectation of the prior for that parameter conditional on the identified parameters. The second indicator is more generally applicable and considers the rate at which the posterior precision gets updated as the sample size (T) is increased. For identified parameters the posterior precision rises with T, whilst for an unidentified parameter its posterior precision may be updated but its rate of update will be slower than T. This result assumes that the identified parameters are -consistent, but similar differential rates of updates for identified and unidentified parameters can be established in the case of super consistent estimators. These results are illustrated by means of simple DSGE models.

Keywords: Bayesian identification, DSGE models, posterior updating, New Keynesian Phillips Curve

JEL Classification: C11, C15, E17

Suggested Citation

Koop, Gary and Pesaran, M. Hashem and Smith, Ron P., On Identification of Bayesian DSGE Models. IZA Discussion Paper No. 5638. Available at SSRN: https://ssrn.com/abstract=1812523

Gary Koop (Contact Author)

University of Strathclyde, Glasgow - Strathclyde Business School - Department of Economics ( email )

100 Cathedral Street
Glasgow G4 0LN
United Kingdom

M. Hashem Pesaran

University of Southern California - Department of Economics

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

University of Cambridge - Trinity College (Cambridge) ( email )

United Kingdom

Ron P. Smith

Birkbeck College ( email )

Malet Street
London WC1E 7HX
United Kingdom
+44 207 631 6413 (Phone)
+44 207 631 6416 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
60
Abstract Views
497
rank
241,615
PlumX Metrics