The Paper provides new tools for the evaluation of DSGE models, and applies it to a large-scale New Keynesian dynamic stochastic general equilibrium (DSGE) model with price and wage stickiness and capital accumulation. Specifically, we approximate the DSGE model by a vector autoregression (VAR),...

Smets and Wouters (2003) find that at short- and medium-term horizons stochastic variations in the goods market mark-up are the most important source of inflation variability in the euro area. This article shows that an empirically plausible alternative interpretation is that the estimated price...