Assessing the Potential of DSGE Model Evaluation in a Bayesian Framework

In the recent macroeconometric literature, there has been a growing interest in using Dynamic Stochastic General Equilibrium Models (DSGE) in way of explaining macroeconomic ‡uctuations and using the models for quantitative policy analysis. Understanding if a certain economic model can explain real data has a prominent place in the research agenda of econometricians and macroeconomists. In two in‡uential papers, Del Negro and Schorfheide (2004) and Del Negro, Schorfheide, Smets and Wouters (2007), an important Bayesian econometrics procedure to estimate DSGE models by using Vector Autoregressive (VAR) approach is presented. This methodology helps economists to choose the best model to represent real data among a theoretical framework from the economic literature, a statistical representation from the data and a combination between the two, a DSGE-VAR representation. The goal of this paper is to study the properties of this famous procedure and to try to highlight some of its aspects carrying out three MonteCarlo experiments which hint the possibility of improvement. JEL CODES: C11, C15, C32