Information criteria for impulse response function matching estimation of DSGE models

Abstract

We propose a new Information Criterion for Impulse Response Function Matching estimators of the structural parameters of macroeconomic models. The main advantage of our procedure is that it allows the researcher to select the impulse responses that are most informative about the deep parameters, therefore reducing the bias and improving the efficiency of the estimates of the model's parameters. We show that our method substantially changes key parameter estimates of representative Dynamic Stochastic General Equilibrium models, thus reconciling their empirical results with the existing literature. Our criterion is general enough to apply to impulse responses estimated by VARs, local projections, as well as simulation methods.J.E.L. Codes: C32, E47, C52, C53.Acknowledgements. We thank Craig Burnside for sharing his codes and for many useful suggestions along the way. We also thank L. Christiano for making the Altig et al. (2004) codes available in his webpage. We gratefully acknowledge comments from

Structural versus matching estimation: Transmission mechanisms in Armenia

“…Hall, Inoue, Nason, and Rossi (2012) address this concern by proposing a method to pick impulse response functions (IRFs) that are based on valid and relevant information. The picked IRFs not only provide a more reliable estimator, but also indicate valid and relevant portions of the model, where validity and relevance refers to accurate description of the transmission of shocks into the economy.…”

“…The picked IRFs not only provide a more reliable estimator, but also indicate valid and relevant portions of the model, where validity and relevance refers to accurate description of the transmission of shocks into the economy. This paper is, to our knowledge, the first study to use the methods in Hall, Inoue, Nason, and Rossi (2012) in the context of both structural and reduced form estimation, with the scope of pin-pointing valid and relevant information for policy makers in terms of both economic structure and shock transmissions.…”

“…The methods proposed in Hall, Inoue, Nason, and Rossi (2012) are especially relevant for developing countries, where there is not enough data for accurate estimation of a fullscale nonlinear DSGE model. An interesting example of a developing country where such devices are valuable is Armenia.…”

“…We then introduce a small scale New Keynesian open economy model to quantify the exchange-rate pass-through to output and prices. We estimate the model both directly (structural estimation) and indirectly (reduced form matching estimation), and use the new methods proposed by Hall, Inoue, Nason, and Rossi (2012) to check for misspecification. We find that inflation targeting, reinforced by a small exchange-rate pass-through to prices, has been very successful in Armenia in the recent decade.…”

“…Section 5 and 6 report and interpret the estimation results for structural and IRF matching estimation, respectively. In Section 7, we check for misspecification via the methods in Hall, Inoue, Nason, and Rossi (2012), which we extend to structural estimation as well. This sections also contains the policy implications based on impulse response functions that contain valid and relevant 1 Dram is the national Armenian currency.…”