Approximating Time Varying Structural Models with Time Invariant Structures
45 Pages Posted: 2 Dec 2015
Date Written: December 2015
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 Gertler and Karadi's (2010) model are studied.
Keywords: Structural model, time varying coefficients, endogenous variations, misspecification
JEL Classification: C10, E27, E32
Suggested Citation: Suggested Citation