DP10803 Approximating time varying structural models with time invariant structures

Author(s): Fabio Canova, Filippo Ferroni, Christian Matthes
Publication Date: September 2015
Keyword(s): endogenous variations, misspecification, Structural model, time varying coefficients
JEL(s): C10, E27, E32
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10803

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.