Working Paper

Note on the role of natural condition of control in the estimation of DSGE models

Abstract: This paper is written by authors from technical and economic fields, motivated to find a common language and views on the problem of the optimal use of information in model estimation. The center of our interest is the natural condition of control -- a common assumption in the Bayesian estimation in technical sciences, which may be violated in economic applications. In estimating dynamic stochatic general equilibrium (DSGE) models, typically only a subset of endogenous variables are treated as measured even if additional data sets are available. The natural condition of control dictates the exploitation of all available information, which improves model adaptability and estimates efficiency. We illustrate our points on a basic RBC model.

Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Research Working Paper

Publication Date: 2011

Number: RWP 11-03