The relationship between DSGE and VAR models

This chapter reviews the literature on the econometric relationship between DSGE and VAR models from the point of view of estimation and model validation. The mapping between DSGE and VAR models is broken down into three stages: 1) from DSGE to statespace model; 2) from state-space model to VAR(1); 3) from VAR(1) to nite order VAR. The focus is on discussing what can go wrong at each step of this mapping and on critically highlighting the hidden assumptions. I also point out some open research questions and interesting new research directions in the literature on the econometrics of DSGE models. These include, in no particular order: understanding the effects of log-linearization on estimation and identi cation; dealing with multiplicity of equilibria; estimating nonlinear DSGE models; incorporating into DSGE models information from atheoretical models and from survey data; adopting exible modelling approaches that combine the theoretical rigor of DSGE models and the econometric model's ability to t the data. Chapter for Advances in Econometrics: VAR Models in Macroeconomics, Financial Econometrics, and Forecasting – New Developments and Applications (Volume 31, 2013), edited by T. Fomby, L. Kilian and A. Murphy. I thank Lutz Kilian for useful comments and suggestions and gratefully acknowledge nancial support from the British Academy Mid-Career Fellowship and from the Economic and Social Research Council through the ESRC Centre for Microdata Methods and Practice grant RES-589-28-0001. Address correspondence to Raffaella Giacomini, University College London, Department of Economics, Gower Street, London WC1E6BT, UK; e-mail: [email protected].