DSGE Scepticism

There's a great new blog being run by Christian Zimmerman (that guy is amazing, the amount of stuff he does online, promoting research is just phenomenal) which aims to discuss research, and in particular DSGE modelling research. The idea is that people comment on the research, and some active online blog discussion of recent research is fostered, instead of online discussion amongst academics just of recent events. This is an excellent idea, and one I hope can be promoted also by what I write here, although my web presence is nothing like Christian Zimmerman's.

The first paper discussed is on estimation of DSGE models in the context of VARs. My sceptical take on the use of econometrics generally was borne out of DSGE models, and their forerunners, RBC models. I've left the following comment (awaiting moderation, last I looked):

I will likely always remain a sceptic of DSGE “estimation”, although it is something that needs to be done. I disagree strongly with any suggestion that estimating an economic model is not a valuable exercise, as is being suggested in the comments here. If DSGE models are ever to have meaning for policy, and in particular macro policy, they have to be estimated, full stop (or period). That they will be rejected is a reason to carry on improving these models, not for rejecting empirical validation per se.

My concerns about the estimation is that little attention appears to be paid to the data, and to the problems it may cause when modelling. There is not a single plot of any of the data series being modelled, nor any reference to their stationarity, or lack of it: By that I mean difference stationarity, or absence of structural breaks. It is well documented the adverse affect of such data ailments, hence my concern.

On top of that, there is no reporting of the actual model estimated, and no attempt to check whether the model is an accurate representation of the data: Whether the model is a good fit. This is essential if any trust is to be put in the coefficients pre-identification, let alone afterwards.

I find the recent trend towards assessing econometric models by their impulse responses deeply disturbing. Not least the identification required is untested, but importantly, as Luca Sala and Fabio Canova have shown, impulse responses are very sensitive indeed to changes in identification.

Put simply, there is no justification for departing from traditional methods of reported econometric results, other than that the author of the paper has something to hide.

There is little doubt that estimating a DSGE model will prove a difficult task given non-stationarity and given structural breaks. And the reported paper is a step forward. However, it is still a long way short of what is required if DSGE “estimation” is to establish a decent reputation for itself, a reputation that would allow the speech marks to be removed from the word estimation.

This Blog

This blog is intended as a place where current or recent research is discussed. It is my intention that critical reviews of the econometric aspects of research will be aired here. Too much economic research is based on shoddy econometrics at best, and bizarrely, the comments on that research tend to bypass the econometrics entirely, and focus on the econometric output, or the economic output, of the paper.

Yet the output of any econometric model stands and falls by whether the econometric model fits the data, and is appropriate. Hence almost certainly, these comments are based on a distorted sense of reality, if little is mentioned in the paper about model specification and fit.

Thus it is my intention to be rather dull and boring on here, to ignore sexy findings in papers and instead ask upon what basis were those sexy findings found in the first place.

It should be emphasised I am a practicing econometrician myself, and it is scepticism with the use of econometrics, not econometrics itself, which will draw my critical comments in this blog.