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How do I estimate a DSGE-VECM with YADA?

 

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In order to estimate a DSGE-VECM with YADA you need to rewrite the measurement equation such that they include the cointegrating relations instead of first difference terms. Given that the measurements change you also need to make sure that the data provided by the data construction file is consistent with these changes.

For example, suppose the DSGE model actually states that real consumption and real GDP have a common (technology) trend such that the log ratio of these variables is stationary, but that your measurement equations are expressed in terms of the growth rates of consumption and GDP. That is, that the measurement equations ignore this cointegration implication of the DSGE model.

The cointegration consistent version of the measurement equations will include the variable C-Y and the first difference of Y instead of the first differences of both variables and link these measurements to the corresponding model (state) variables. The DSGE-VAR constructed from the new data and the new measurement equations is equivalent to a DSGE-VECM and may therefore be used to represent the DSGE-VECM version of the DSGE model; see Mellander, Vredin and Warne (1992).

 

 

 


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