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Title: Approximating time varying structural models with time invariant structures

Author(s): Fabio Canova, Filippo Ferroni and Christian Matthes

Publication Date: September 2015

Keyword(s): endogenous variations, misspecification, Structural model and time varying coefficients

Programme Area(s): Monetary Economics and Fluctuations

Abstract: The paper studies how parameter variation affects the decision rules of a DSGE model and structural inference. We provide diagnostics to detect parameter variations and to ascertain whether they are exogenous or endogenous. Identification and inferential distortions when a constant parameter model is incorrectly assumed are examined. Likelihood and VAR-based estimates of the structural dynamics when parameter variations are neglected are compared. Time variations in the financial frictions of a Gertler and Karadi's (2010) model are studied.

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Bibliographic Reference

Canova, F, Ferroni, F and Matthes, C. 2015. 'Approximating time varying structural models with time invariant structures'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10803