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Loss function‐based evaluation of DSGE models
Author(s) -
Schorfheide Frank
Publication year - 2000
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.582
Subject(s) - dynamic stochastic general equilibrium , econometrics , bayesian probability , impulse response , econometric model , economics , portfolio , bayes estimator , inflation (cosmology) , monetary policy , statistics , mathematics , keynesian economics , finance , mathematical analysis , physics , theoretical physics
In this paper we propose a Bayesian econometric procedure for the evaluation and comparison of DSGE models. Unlike in many previous econometric approaches we explicitly take into account the possibility that the DSGE models are misspecified and introduce a reference model to complete the model space. Three loss functions are proposed to assess the discrepancy between DSGE model predictions and an overall posterior distribution of population characteristics that the researcher is trying to match. The evaluation procedure is applied to the comparison of a standard cash‐in‐advance (CIA) and a portfolio adjustment cost (PAC) model. We find that the CIA model has higher posterior probability than the PAC model and achieves a better in‐sample time series fit. Both models overpredict the magnitude of the negative correlation between output growth and inflation. However, unlike the PAC model, the CIA model is not able to generate a positive real effect of money growth shocks on aggregate output. Overall, the impulse response dynamics of the PAC model resemble the posterior mean impulse response functions more closely than the responses of the CIA model. Copyright © 2000 John Wiley & Sons, Ltd.