DSGE model restrictions for structural VAR identification

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 06 October 2010

Working Paper No. 402
By Philip Liu and Konstantinos Theodoridis 

The identification of reduced-form VAR model had been the subject of numerous debates in the literature. Different sets of identifying assumptions can lead to very different conclusions in the policy debate. This paper proposes a theoretically consistent identification strategy using restrictions implied by a DSGE model. Monte Carlo simulations suggest the proposed identification strategy is successful in recovering the true structural shocks from the data. In the face of misspecified model restrictions, the data tend to push the identified VAR responses away from the misspecified model and closer to the true data generating process.

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