NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Confronting Model Misspecification in Macroeconomics

Daniel F. Waggoner, Tao Zha

NBER Working Paper No. 17791
Issued in January 2012
NBER Program(s):   EFG   ME

We estimate a Markov-switching mixture of two familiar macroeconomic models: a richly parameterized DSGE model and a corresponding BVAR model. We show that the Markov-switching mixture model dominates both individual models and improves the fit considerably. Our estimation indicates that the DSGE model plays an important role only in the late 1970s and the early 1980s. We show how to use the mixture model as a data filter for estimation of the DSGE model when the BVAR model is not identified. Moreover, we show how to compute the impulse responses to the same type of shock shared by the DSGE and BVAR models when the shock is identified in the BVAR model. Our exercises demonstrate the importance of integrating model uncertainty and parameter uncertainty to address potential model misspecification in macroeconomics.

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Document Object Identifier (DOI): 10.3386/w17791

Published: Waggoner, Daniel F. & Zha, Tao, 2012. "Confronting model misspecification in macroeconomics," Journal of Econometrics, Elsevier, vol. 171(2), pages 167-184.

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