Model appropriateness for a given economy

Dear Dynare users…:),

May I ask how to convince other researchers that a model is appropriate for a given economy? Is there a known or standard way to do it? I already used a business cycle accounting model to show that some frictions are not needed for modeling economy A, and I also compare moments from the model to data moments (which seems ok to me) before doing policy analysis. But reviewer says, “I don’t know if this model is appropriate for economy A.” Or maybe I should include all frictions and show that removing some frictions improves the fit of the model (using marginal likelihood plots)? Is there a standard way to show DSGE model appropriateness for an economy? Thanks for your help.

Your referee’s comment is not helpful. What would he/she like to see to be convinced? Saying “I don’t know” does not help.
Checking features with a marginal data density analysis is a potential way to go. But that requires estimating the model and it’s not clear which features should be tested to convince the referee. If the model already matches the moments, why is he/she still skeptical?

Thanks for the reply, Prof. Pfeifer,

I estimated the model, but of course, without the features that I found to be irrelevant from the BCA analysis. I have sent him a reply for clarification, though. I will do the marginal data density analysis in another project.

If you don’t mind, may I also ask? The reviewer says the model is off the shelf. I am not sure, but maybe ‘off the shelf model’ is a technical phrase in macro research? Certainly, the model contains a subset of available frictions in the literature, but that is not necessarily 'off the shelf, right? That is if you have an argument about why you chose some frictions and excluded others from your model.

Off the shelf often means that you take a standard model without tailoring it to the particular economy at hand. Sometimes that is not a bad thing as standard models have become the standard for a reason. But sometimes you are missing features that have been shown to be crucial for the economy at hand. For example, a model built for the US would probably not fit for a big oil-exporting country.

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Hi Prof. Pfeifer, may I ask about your statement above? As you said, a model built for one country would probably not fit another because each country’s structure could be different.

I once got this from a reviewer, “we suggest expanding your article to cover several countries and make comparison between them, and send it back to us.” This seems like estimating/calibrating the same model for several countries. In the “Open Economy Macroeconomics” book by Martin Uribe and Stephanie, for example, the authors sometimes calibrate the same model for Developing and Developed economies. But how can we justify such a comparison since we are ignoring structural differences between developing and developed economies in this case?

Or maybe I can rather compare my results to other existing studies (for different economies) on the same topic. So here, the research question is kinda the same, but the model’s structure would be different for each economy since each paper is independent and focuses on a single economy.

Which is a better or acceptable way to expand results across several countries? Thanks!!

It’s always a matter of the degree of differences. Sometimes the differences between countries can arguably be represented as differences in structural parameters, while at other times it’s about the model having different features. The most important thing is that you can defend your choices. I find referee requests like the one above pretty unhelpful. The model space is huge and they are sending you on a fishing expedition without a clear path on what they would like to see to be convinced or any indication of what we might learn from that.