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Federal Reserve Bank of Atlanta
FRB Atlanta Working Paper
Confronting model misspecification in macroeconomics
Daniel F. Waggoner
Tao Zha
Abstract

We confront model misspecifications in macroeconomics by proposing an analytic framework for merging multiple models. This framework allows us to address uncertainty about models and parameters simultaneously and trace out the historical periods in which one model dominates other models. We apply the framework to a richly parameterized dynamic stochastic general equilibrium (DSGE) model and a corresponding Bayesian vector autoregressive model. The merged model, fitting the data better than both individual models, substantially alters economic inferences about the DSGE parameters and the implied impulse responses.


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Daniel F. Waggoner & Tao Zha, Confronting model misspecification in macroeconomics, Federal Reserve Bank of Atlanta, FRB Atlanta Working Paper 2010-18, 2010.
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