Using Structural and Nonstructural Shocks in the Estimation of DSGE Models
SeriesEconometrics Seminars and Workshop Series
Speaker(s)Fabio Canova (BI Norwegian Business School, Norway)
LocationUniversity of Amsterdam, Roeterseilandcampus, room E0.22
Date and time
February 24, 2023
12:30 - 13:30
Dynamic Stochastic General Equilibrium (DSGE) models are typically singular. Thus, for likelihood-based structural parameters estimation, one needs to select the variables to use or add artificial disturbances to remove the singularity. Alternatively, one could use a composite likelihood of non -singular models. I compare various estimation approaches, provide conditions for the additional shocks to remove singularity, study shock identification and parameter estimates distortions; and reexamine the sources of macroeconomic fluctuations. Adding shocks may be counterproductive. A composite likelihood approach minimizes the distortions. The importance of monetary shocks for inflation is likely to be underestimated; TFP shocks are driving output fluctuations.