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Is Time an Illusion? A Bootstrap Likelihood Ratio Approach to Testing Shock Transmission Delays in DSGE Models

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Abstract

Recently developed models of the business cycle exhibit a recursive timing structure, which enforces delayed propagation of exogenous shocks driving short-run dynamics. We propose a simple empirical strategy to test for the relevance of timing restrictions and ensuing shock transmission delays in general DSGE environments. Based on a bootstrap maximum likelihood estimator, our approach mitigates over-rejection concerns typically arising from conventional tests of non-linear hypotheses that exploit first-order asymptotic approximations. We showcase the empirical usefulness of the testing procedure by means of numerical simulations of a workhorse model of the monetary transmission mechanism.

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  • Giovanni Angelini & Luca Fanelli & Marco M. Sorge, 2022. "Is Time an Illusion? A Bootstrap Likelihood Ratio Approach to Testing Shock Transmission Delays in DSGE Models," CSEF Working Papers 653, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    • Handle: RePEc:sef:csefwp:653
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    Keywords

    DSGE models; Timing restrictions; Transmission delays.;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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