Discussion paper

DP10803 Approximating time varying structural models with time invariant structures

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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Citation

Canova, F and C Matthes (eds) (2015), “DP10803 Approximating time varying structural models with time invariant structures”, CEPR Press Discussion Paper No. 10803. https://cepr.org/publications/dp10803