Approximating Time Varying Structural Models with Time Invariant Structures
43 Pages Posted: 8 Sep 2015
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Approximating Time Varying Structural Models with Time Invariant Structures
Date Written: September 2015
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.
Keywords: endogenous variations, misspecification, Structural model, time varying coefficients
JEL Classification: C10, E27, E32
Suggested Citation: Suggested Citation