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Measurement with Some Theory: a New Approach to Evaluate Business Cycle Models
Paustian, Matthias; Canova, Fabio
Universitat Pompeu Fabra. Departament d'Economia i Empresa
We propose a method to evaluate cyclical models which does not require knowledge of the DGP and the exact empirical specification of the aggregate decision rules. We derive robust restrictions in a class of models; use some to identify structural shocks and others to evaluate the model or contrast sub-models. The approach has good size and excellent power properties, even in small samples. We show how to examine the validity of a class of models, sort out the relevance of certain frictions, evaluate the importance of an added feature, and indirectly estimate structural parameters.
Misspecification, Sign restrictions, Shock identification, Model validation.
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