I am not sure how dynare cast model into state space representation. My feeling is that dynare simply take the solution of DSGE model as the state transition equations in state space representation. Since all variables in DSGE are theoretical ones, they are all treated as unobservables. The measurement equations we further define indicate how theoretical variables (unobservables) link to their observations. But in this way, the number of state variable in state space representation tend to be large hence Kalman filter becomes less efficient.
Am I correct?