Back to Square One: Identification Issues in DSGE Models

48 Pages Posted: 3 Feb 2006

See all articles by Fabio Canova

Fabio Canova

Bi norwegian business school

Luca Sala

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2006

Abstract

We investigate identifiability issues in DSGE models and their consequences for parameter estimation and model evaluation when the objective function measures the distance between estimated and model impulse responses. We show that observational equivalence, partial and weak identification problems are widespread, that they lead to biased estimates, unreliable t-statistics and may induce investigators to select false models. We examine whether different objective functions affect identification and study how small samples interact with parameters and shock identification. We provide diagnostics and tests to detect identification failures and apply them to a state-of-the-art model.

Keywords: identification, DSGE models

JEL Classification: C13, C51, C52, E32

Suggested Citation

Canova, Fabio and Sala, Luca, Back to Square One: Identification Issues in DSGE Models (January 2006). ECB Working Paper No. 583; IGIER Working Paper No. 303; Banco de España Research Paper No. WP-0715. Available at SSRN: https://ssrn.com/abstract=876947

Fabio Canova (Contact Author)

Bi norwegian business school ( email )

Nydalsveien 37
Oslo, 0484
Norway

Luca Sala

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER) ( email )

Via Roentgen 1
Milan, 20136
Italy
+39 02 5836 3326 (Phone)

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