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Working Papers, No. 2020-29, November 2020 Crossref
Mind the Gap! Stylized Dynamic Facts and Structural Models

We study what happens to identified shocks and to dynamic responses when the data generating process features q disturbances but q1 < q variables are used in an empirical model. Identified shocks are linear combinations of current and past values of all structural disturbances and do not necessarily combine disturbances of the same type. Theory-based restrictions may be insufficient to obtain structural dynamics. We revisit the evidence regarding the transmission of house price and of uncertainty shocks. We provide suggestions on how to validate the dynamics of larger scale DSGEs with smaller scale VARs.


Working papers are not edited, and all opinions and errors are the responsibility of the author(s). The views expressed do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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