I heard that observed variables in dsge model can only be flow variables, is this true? Can’t observed variables also include stock variables?
I am currently debugging my programs for my thesis, which is is due soon.
Thank you very much and look forward to hearing from you.
No, you can of course mix stock and flows, but the arising issues are somewhat tricky. You can find more details in Pfeifer(2013): “A Guide to Specifying Observation Equations for the Estimation of DSGE Models”