DP10803 | Approximating time varying structural models with time invariant structures

Publication Date

06/09/2015

JEL Code(s)

  • C10, E27, E32

Keyword(s)

  • Endogenous variations, Misspecification, Structural Model, Time varying coefficients

Programme Area(s)

  • Monetary Economics and Fluctuations

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.