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Evaluating Historical Episodes using Shock Decompositions in the DSGE Model

Aligishiev, Z., Ben-Gad, M. ORCID: 0000-0001-8641-4199 and Pearlman, J. (2020). Evaluating Historical Episodes using Shock Decompositions in the DSGE Model (20/10). London, UK: Department of Economics, City University of London.

Abstract

We present alternative methods for calculating and interpreting the influence of exogenous shocks on historical episodes within the context of DSGE models. We show analytically why different methods for calculating shock decompositions can generate conflicting interpretations of the same historical episodes. We illustrate this point using an extended version of Drautzburg and Uhlig's (2015) model of the U.S. economy, focusing on the periods 1964-1966, 1979-1987, 2007-2008 and 2016-2018. We argue that the best method for analyzing particular episodes is one which isolates the influence of the shocks during the period under consideration and where the initial conditions represent the system's distance from steady state at the beginning of the episode.

Publication Type: Monograph (Discussion Paper)
Additional Information: Copyright 2020, the authors.
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HC Economic History and Conditions
Q Science > QA Mathematics
Departments: School of Arts & Social Sciences > Economics
School of Arts & Social Sciences > Economics > Discussion Paper Series
Date Deposited: 01 May 2020 10:54
URI: https://openaccess.city.ac.uk/id/eprint/24111
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