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Fat Tailed DSGE Models: A Survey and New Results

Author

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  • Dave, Chetan

    (University of Alberta, Department of Economics)

  • Sorge, Marco

    (University of Salerno)

Abstract

We review recent advances in dynamic stochastic general equilibrium theory concerned with the emergence of fat tailed time series distributions. Focusing on mechanisms that are firmly grounded in structural equilibrium models, we provide a common reference framework to organize existing contributions according to whether they entail extreme business cycle swings as an endogenous response to small and short-lived shocks ('thin in, fat out'), or rather as an automatic consequence of large and/or heteroskedastic exogenous impulses ('fat in, fat out'). Within the former class, non-Gaussian features of equilibrium patterns can endogenously emerge in fully rational, Gaussian environments. Using an empirically plausible real business cycle framework, we also report novel simulation-based evidence that helps reconcile theoretical predictions with the documented higher-order properties of time-series data for output measures.

Suggested Citation

  • Dave, Chetan & Sorge, Marco, 2023. "Fat Tailed DSGE Models: A Survey and New Results," Working Papers 2023-3, University of Alberta, Department of Economics.
  • Handle: RePEc:ris:albaec:2023_003
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    File URL: https://sites.ualberta.ca/~econwps/2023/wp2023-03.pdf
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    More about this item

    Keywords

    non-Gaussian distributions; fat tails; DSGE models; minimum distance estimation;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General

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