Investigating the Relationship Between DSGE and SVAR Models

T Robinson, A Pagan

National Centre for Econometrics Research | Published : 2016


DSGE models often contain variables for which data is not observed when estimating. Although DSGE models generally imply that there is a finite order SVAR in all the variables this may no longer be true for SVARs just in observable variables, and so there is a VAR-truncation problem. The paper examines this issue. It looks at five different studies using DSGE models that appear in the literature. Generally it emerges that the truncation issue is probably not that important, except possibly in small open economy models with external debt. Even when there is no truncation problem in VARs (which control the dynamics) the structural impulse responses from both models may be different due to diff..

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