This article 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 state-space model; (2) from state-space model to VAR( ); (3) from VAR( ) to finite-order VAR. The focus is on discussing what can go wrong at each step of this mapping and on critically highlighting the hidden assumptions. I also point out some open research questions and interesting new research directions in the literature on the econometrics of DSGE models. These include, in no particular order: understanding the effects of log-linearization on estimation and identification; dealing with multiplicity of equilibria; estimating nonlinear DSGE models; incorporating into DSGE models information from atheoretical models and from survey data; adopting flexible modeling approaches that combine the theoretical rigor of DSGE models and the econometric model’s ability to fit the data.
I thank Lutz Kilian for useful comments and suggestions and gratefully acknowledge financial support from the British Academy Mid-Career Fellowship and from the Economic and Social Research Council through the ESRC Centre for Microdata Methods and Practice grant RES-589-28-0001.
Giacomini, R. (2013), "The Relationship Between DSGE and VAR Models", VAR Models in Macroeconomics – New Developments and Applications: Essays in Honor of Christopher A. Sims (Advances in Econometrics, Vol. 32), Emerald Group Publishing Limited, Leeds, pp. 1-25. https://doi.org/10.1108/S0731-9053(2013)0000031001
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