This chapter reviews the literature on the econometric relationship between DSGE and VAR models from the point of view of estimation and model validation. The mapping between DSGE and VAR models is broken down into three stages: 1) from DSGE to statespace model; 2) from state-space model to VAR(1); 3) from VAR(1) to nite order VAR. The focus is on discussing what can go wrong at each step of th...

This study explores three alternative econometric interpretations of dynamic, stochastic general equilibrium (DSGE) models. Under a strong econometric interpretation, these models provide likelihood functions for observed sequences of prices and quantities. Given this interpretation, most DSGE models are rejected using classical econometrics and assigned zero probability in a Bayesian approach....

The predictive likelihood is useful for ranking models in forecast comparison exercises using Bayesian inference. We discuss how it can be estimated, by means of marginalization, for any subset of the observables in linear Gaussian state-space models. We compare macroeconomic density forecasts for the euro area of a DSGE model to those of a DSGE-VAR, a BVAR, and a multivariate random walk over ...

Advanced Bayesian methods are employed in estimating dynamic stochastic general equilibrium (DSGE) models. Although policymakers and practitioners are particularly interested in DSGE models, these are typically too stylized to be taken directly to the data and often yield weak prediction results. Hybrid models can deal with some of the DSGE model misspeci…cations. Major advances in Bayesian est...

Over the last few years, there has been a growing interest in DSGE modelling for predicting macroeconomic ‡uctuations and conducting quantitative policy analysis. Hybrid DSGE models have become popular for dealing with some of the DSGE misspeci…cations as they are able to solve the tradeo¤ between theoretical coherence and empirical …t. However, these models are still linear and they do not con...

This paper tests the ability of popular New Keynesian models, which are traditionally used to study monetary policy and business cycles, to match the data regarding a key channel for monetary transmission: the dynamic interactions between macroeconomic variables and their corresponding expectations. In the empirical analysis, we exploit direct data on expectations from surveys. To explain the j...

E C O N O M I C R E V I E W Second Quarter 2006 Dynamic stochastic general equilibrium (DSGE) models are becoming increasingly popular in central banking circles. The number of central bank–sponsored conferences on DSGE modeling and the amount of staff resources devoted to DSGE model development and estimation have risen dramatically over the past five years. This trend has affected monetary po...