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Which Structural Parameters Are "Structural"? Identifying the Sources of Instabilities in Economic Models

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Author Info

  • Inoue, Atsushi
  • Rossi, Barbara

Abstract

The objective of this paper is to identify which parameters of a model are stable over time. Existing procedures can only be used to test whether a given subset of parameters is stable, and cannot be used to find which subset of parameters is stable. We propose a new procedure that is informative on the nature of instabilities affecting economic models, and sheds light on the economic interpretation and causes of such instabilities. Furthermore, our procedure provides clear guidelines on which parts of the model are reliable for policy analysis and which are possibly mis-specified. Our empirical findings suggest that instabilities during the Great Moderation were mainly concentrated in Euler and IS equations as well as in monetary policy. Such results offer important insights to guide the future theoretical development of macroeconomic models.

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Bibliographic Info

Paper provided by Duke University, Department of Economics in its series Working Papers with number 08-02.

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Length: 39 Pages
Date of creation: 2008
Date of revision:
Handle: RePEc:duk:dukeec:08-02

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Postal: Department of Economics Duke University 213 Social Sciences Building Box 90097 Durham, NC 27708-0097
Phone: (919) 660-1800
Fax: (919) 684-8974
Web page: http://econ.duke.edu/

Related research

Keywords: Instability; Model Evaluation; Great Moderation;

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References

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  1. Jesús Fernández-Villaverde & Juan F Rubio-Ramírez, 2007. "How Structural Are Structural Parameters?," Levine's Bibliography 843644000000000057, UCLA Department of Economics.
  2. Marco Del Negro & Frank Schorfheide & Frank Smets & Raf Wouters, 2004. "On the fit and forecasting performance of New Keynesian models," Working Paper, Federal Reserve Bank of Atlanta 2004-37, Federal Reserve Bank of Atlanta.
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Cited by:
  1. Philippe Bacchetta & Eric van Wincoop, 2009. "On the Unstable Relationship between Exchange Rates and Macroeconomic Fundamentals," Working Papers 272009, Hong Kong Institute for Monetary Research.

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