Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Philadelphia
Working Papers
A narrative approach to a fiscal DSGE model
Thorsten Drautzburg
Abstract

This version: March 28, 2016 First version: February 2014

Structural DSGE models are used both for analyzing policy and the sources of business cycles. Conclusions based on full structural models are, however, potentially affected by misspecification. A competing method is to use partially identified VARs based on narrative shocks. This paper asks whether both approaches agree. First, I show that, theoretically, the narrative VAR approach is valid in a class of DSGE models with Taylor-type policy rules. Second, I quantify whether the two approaches also agree empirically, that is, whether DSGE model restrictions on the VARs and the narrative variables are supported by the data. To that end, I first adapt the existing methods for shock identification with external instruments for Bayesian VARs in the SUR framework. I also extend the DSGE-VAR framework to incorporate these instruments. Based on a standard DSGE model with fiscal rules, my results indicate that the DSGE model identification is at odds with the narrative information as measured by the marginal likelihood. I trace this discrepancy to differences both in impulse responses and identified historical shocks.


Download Full text
Cite this item
Thorsten Drautzburg, A narrative approach to a fiscal DSGE model, Federal Reserve Bank of Philadelphia, Working Papers 16-11, 28 Mar 2016.
More from this series
JEL Classification:
Subject headings:
Keywords: Fiscal policy; Monetary policy; DSGE model; Bayesian estimation; Narrative shocks; Bayesian VAR
For corrections, contact Beth Paul ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal