City Research Online

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, 2006–2009, 2016–2020 and 2020–2023. 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 balanced growth path at the beginning of the episode.

Publication Type:	Monograph (Working Paper)
Publisher Keywords:	DSGE model; Shock Decomposition; Financial Frictions; Fiscal Policy
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
Departments:	School of Policy & Global Affairs School of Policy & Global Affairs > Economics
SWORD Depositor:	Symplectic Administrator

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