2
$\begingroup$

I'm wondering what methods are used in economics, specially in macro, to deal with model misspecification.

I've already searched the web, but I may be missing some methods. Therefore, I ask you for some help.

$\endgroup$
3
$\begingroup$

Thomas Sargent and Lars Peter Hansen have a series of work on "robustness", a theory (and technique) that deals directly with potential model misspecifications in the context of macro. [The term "robustness" derives from robust control theory].

Sargent's website has a page dedicated to this topic. The two also published a book, Robustness, that contains the main results of their work to date. Below is the publisher's description:

The standard theory of decision making under uncertainty advises the decision maker to form a statistical model linking outcomes to decisions and then to choose the optimal distribution of outcomes. This assumes that the decision maker trusts the model completely. But what should a decision maker do if the model cannot be trusted?

Lars Hansen and Thomas Sargent, two leading macroeconomists, push the field forward as they set about answering this question. They adapt robust control techniques and apply them to economics. By using this theory to let decision makers acknowledge misspecification in economic modeling, the authors develop applications to a variety of problems in dynamic macroeconomics.

Technical, rigorous, and self-contained, this book will be useful for macroeconomists who seek to improve the robustness of decision-making processes.

$\endgroup$
0
$\begingroup$

I think it really depends on what your views on model misspecification are. How do you determine whether your model is misspecified? Testing is not really feasible in a Bayesian framework which is increasingly common in macroeconomics nor is it really considered when you have stuctural or theory-based models. Oftentimes the closest people get to dealing with this is to use HAC standard errors to deal with heteroskedasticy and autocorrelation. In empirical VAR's the main approaches are lag selection to address autocorrelation concerns and either differencing or using a Minnesota type prior to address non-stationarity concerns (or going the cointegration route which also addresses non-stationarity). The David Hendry school of thought takes a different approach by incorporating testing for misspecification into the model selection / model design procedure and including non-linear transformations of the data, various indicator saturation procedures and lags.

$\endgroup$
  • $\begingroup$ Hi Andrew, could you give some references? $\endgroup$ – An old man in the sea. Jul 25 at 16:40
  • $\begingroup$ Also, structure a bit more your answer, using paragraphs, going into a bit more detail for each topic you refer to? It's just that you refer to so much, in such a small number of lines... thanks ;) $\endgroup$ – An old man in the sea. Jul 25 at 17:07
  • $\begingroup$ halbert white wrote a book on mis-specification but I don't think it's related to macro-economics, atleast directly. $\endgroup$ – mark leeds Jul 27 at 18:42

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.