Implications of Partial Information for Econometric Modeling of Macroeconomic Systems

37 Pages Posted: 20 Jun 2019

See all articles by Adrian Pagan

Adrian Pagan

University of Sydney; University of Sydney

Tim Robinson

University of Melbourne - Melbourne Institute of Applied Economic and Social Research

Date Written: June 17, 2019

Abstract

Representative models of the macroeconomy (RMs), such as DSGE models, frequently contain unobserved variables. A finite-order VAR representation in the observed variables may not exist, and therefore the impulse responses of the RMs and SVAR models may differ. We demonstrate this divergence often is: (i) not substantial; (ii) reflects the omission of stock variables from the VAR; and (iii) when the RM features I (1) variables can be ameliorated by estimating a latent-variable VECM. We show that DSGE models utilize identifying restrictions stemming from common factor dynamics reflecting statistical, not economic, assumptions. We analyze the use of measurement error, and demonstrate that it may result in unintended consequences, particularly in models featuring I (1) variables.

Keywords: SVAR, Partial Information, Identification, Measurement Error, DSGE

JEL Classification: E37, C51, C52

Suggested Citation

Pagan, Adrian and Robinson, Tim, Implications of Partial Information for Econometric Modeling of Macroeconomic Systems (June 17, 2019). CAMA Working Paper No. 41/2019. Available at SSRN: https://ssrn.com/abstract=3407045 or http://dx.doi.org/10.2139/ssrn.3407045

Adrian Pagan

University of Sydney ( email )

Rm 370 Merewether (H04)
Sydney, NSW 2006 2008
Australia

University of Sydney ( email )

Rm 370 Merewether (H04)
Sydney, NSW 2006 2008
Australia

Tim Robinson (Contact Author)

University of Melbourne - Melbourne Institute of Applied Economic and Social Research ( email )

Level 5, FBE Building, 111 Barry Street
161 Barry Street
Carlton, VIC 3053
Australia

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