Validating DSGE Models Through Dynamic Factor Models

Download or read book Validating DSGE Models Through Dynamic Factor Models written by Mario Forni and published by . This book was released on 2022 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: We urge the use of Structural Dynamic Factor Models (DFM) to validate and to guide the construction of Dynamic Stochastic General Equilibrium (DSGE) models. The main reason is that the log-linear solution of a DSGE model has a factor structure which ensures consistency between the representations of the two models. We assess, by means of a few simulations, the validity of SDFM as an empirical tool to complement DSGE analysis. Using a DSGE model as data generating process, the factor model provides very accurate estimates of the true impulse response functions. As an application, we validate a theory of TFP news and surprise shocks.