A Narrative Approach to a Fiscal DSGE Model

70 Pages Posted: 27 Apr 2016

See all articles by Thorsten Drautzburg

Thorsten Drautzburg

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Date Written: 2016-03-28

Abstract

This version: March 28, 2016 First version: February 2014 {{p}} 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.

Keywords: Fiscal policy, Monetary policy, DSGE model, Bayesian estimation, Narrative shocks, Bayesian VAR

JEL Classification: C32, E32, E52, E62

Suggested Citation

Drautzburg, Thorsten, A Narrative Approach to a Fiscal DSGE Model (2016-03-28). FRB of Philadelphia Working Paper No. 16-11, Available at SSRN: https://ssrn.com/abstract=2770990

Thorsten Drautzburg (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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