Warning message

CEPR.org and portal.cepr.org will be unavailable between 22:00-22:30 GMT on the 16th September 2019 due to maintenance.

DP10140 | Identifying the Sources of Model Misspecification

Publication Date


JEL Code(s)


Programme Area(s)


In this paper we propose empirical methods for detecting and identifying misspecifications in DSGE models. We introduce wedges in a DSGE model and identify potential misspecification via forecast error variance decomposition (FEVD) and marginal likelihood analyses. Our simulation results based on a small-scale DSGE model demonstrate that our method can correctly identify the source of misspecification. Our empirical results show that the medium-scale New Keynesian DSGE model that incorporates features in the recent empirical macro literature is still very much misspecified; our analysis highlights that the asset and labor markets may be the source of the misspecification.