Approximating Time Varying Structural Models With Time Invariant Structures
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. Identifi cation 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 Gertler and Karadi's (2010) model are studied.
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Description: Full text
Provider: Federal Reserve Bank of Richmond
Part of Series: Working Paper
Publication Date: 2015-10-23
Pages: 42 pages