Selecting structural innovations in DSGE models

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  • Filippo Ferroni, Federal Reserve Bank of Chicago
  • ,
  • Stefano Grassi
  • Miguel A. León-Ledesma, Kent University

Dynamic stochastic general equilibrium (DSGE) models are typically estimated assuming the existence of certain structural shocks that drive macroeconomic fluctuations. We analyze the consequences of estimating shocks that are “nonexistent” and propose a method to select the economic shocks driving macroeconomic uncertainty. Forcing these nonexisting shocks in estimation produces a downward bias in the estimated internal persistence of the model. We show how these distortions can be reduced by using priors for standard deviations whose support includes zero. The method allows us to accurately select shocks and estimate model parameters with high precision. We revisit the empirical evidence on an industry standard medium-scale DSGE model and find that government and price markup shocks are innovations that do not generate statistically significant dynamics.

OriginalsprogEngelsk
TidsskriftJournal of Applied Econometrics
Vol/bind34
Nummer2
Sider (fra-til)205-220
Antal sider16
ISSN0883-7252
DOI
StatusUdgivet - mar. 2019
Eksternt udgivetJa

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