Paper #927

Title:

Back to square one: Identification issues in DSGE models

Authors:

Fabio Canova and Luca Sala

Date:

May 2005 (Revised: September 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, Impulse Responses, DSGE models, small samples

JEL codes:

C10, C52, E32, E50

Area of Research:

Macroeconomics and International Economics

Published in:

Journal of Monetary Economics, 56(4), 2009, 431-449

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