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Mind the Gap! Stylized Dynamic Facts and Structural Models

  • Fabio Canova
  • Filippo Ferroni
American Economic Journal: Macroeconomics
vol. 14, no. 4, October 2022
(pp. 104-35)
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Abstract

We study what happens to identified shocks and to dynamic responses when the data generating process features q disturbances but q1 < q variables are used in an empirical model. Identified shocks are linear combinations of current and past values of all structural disturbances and do not necessarily combine disturbances of the same type. Theory-based restrictions may be insufficient to obtain structural dynamics. We revisit the evidence regarding the transmission of house price and of uncertainty shocks. We provide suggestions on how to compare the dynamics of larger scale DSGEs models with smaller scale VARs.

Citation

Canova, Fabio, and Filippo Ferroni. 2022. "Mind the Gap! Stylized Dynamic Facts and Structural Models." American Economic Journal: Macroeconomics, 14 (4): 104-35. DOI: 10.1257/mac.20200054

Additional Materials

JEL Classification

  • E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
  • E13 General Aggregative Models: Neoclassical
  • E23 Macroeconomics: Production
  • E31 Price Level; Inflation; Deflation
  • E43 Interest Rates: Determination, Term Structure, and Effects
  • R31 Housing Supply and Markets
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