Working Paper Series no. 578: 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. 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.

Fabio Canova, Filippo Ferroni and Christian Matthes
December 2015

Classification JEL : C10, E27, E32

Keywords : Structural model, time varying coefficients, endogenous variations, misspecification