Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/200562
Authors: 
Ferroni, Filippo
Grassi, Stefano
León-Ledesma, Miguel A.
Year of Publication: 
2017
Series/Report no.: 
Working Paper No. 2017-20
Abstract: 
DSGE models are typically estimated assuming the existence of certain primal shocks that drive macroeconomic fluctuations. We analyze the consequences of estimating shocks that are "non-existent" and propose a method to select the primal shocks driving macroeconomic uncertainty. Forcing these non-existing shocks in estimation produces a downward bias in the estimated internal persistence of the model. We show how these distortions can be reduced by using priors for standard deviations whose support includes zero. The method allows us to accurately select primal shocks and estimate model parameters with high precision. We revisit the empirical evidence on an industry standard medium-scale DSGE model and find that government and price markup shocks are innovations that do not generate statistically significant dynamics.
Subjects: 
Reduced rank covariance matrix
DSGE models
stochastic dimension search
JEL: 
C10
E27
E32
Document Type: 
Working Paper

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