Working Paper: CEPR ID: DP10803
Authors: Fabio Canova; Filippo Ferroni; Christian Matthes
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 Codes: C10; E27; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exogenous parameter variations (C51) | unchanged structural dynamics (C69) |
| endogenous parameter variations (C51) | altered structural dynamics (C69) |
| neglecting endogenous parameter variations (C51) | significant biases in parameter estimates (C51) |
| neglecting endogenous parameter variations (C51) | mischaracterization of structural dynamics (C69) |
| endogenous parameter variations (C51) | incorrect welfare cost comparisons (D69) |
| endogenous parameter variations (C51) | distorted estimates (C51) |
| time-invariant models (C32) | deteriorating performance when substantial parameter variations occur (D29) |