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Is Time an Illusion? A Bootstrap Likelihood Ratio Test for Shock Transmission Delays in DSGE Models

Author

Listed:
  • Giovanni Angelini

    (University of Bologna)

  • Luca Fanelli

    (University of Bologna)

  • Marco M. Sorge

    (University of Salerno, University of Göttingen and CSEF - DISES)

Abstract

Several business cycle models exhibit a recursive timing structure, which enforces delayed propagation of exogenous shocks driving short-run dynamics. We propose a bootstrap-based empirical strategy to test for the relevance of timing restrictions and ensuing shock transmission delays in DSGE environments. In the presence of strong identification, we document how likelihood-based tests in bootstrap-resamples can be used to empirically assess short-run restrictions placed by informational structures on a given model’s equilibrium representation, thereby enhancing coherence between theory and measurement. We evaluate the size properties of our procedure in short time series by conducting a number of numerical experiments on a popular New Keynesian model of the monetary transmission mechanism. An empirical application to U.S. data from the Great Moderation period allows us to revisit and qualify previous findings in the field by lending support to the conventional (unrestricted) timing protocol, whereby inflation and output gap do respond on impact to monetary policy innovations.

Suggested Citation

  • Giovanni Angelini & Luca Fanelli & Marco M. Sorge, 2025. "Is Time an Illusion? A Bootstrap Likelihood Ratio Test for Shock Transmission Delays in DSGE Models," Computational Economics, Springer;Society for Computational Economics, vol. 65(5), pages 2477-2503, May.
    • Handle: RePEc:kap:compec:v:65:y:2025:i:5:d:10.1007_s10614-024-10640-2
    DOI: 10.1007/s10614-024-10640-2
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    Keywords

    DSGE models; Timing restrictions; Bootstrap; Maximum likelihood;
    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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