Parameter drifting in the second order approximated model



Year of publication 2011
MU Faculty or unit

Faculty of Economics and Administration

Description We investigate the possible drifting of structural parameters in an estimated small open economy DSGE model. We run a particle filter on the second-order approximated model. Nonlinear filtration is necessary for model agents to capture nontrivial influence of structural changes on model agents' behaviour. In our previous work we found out that models designed for monetary policy analysis and forecasting of an economy that is undergoing structural changes must include time-varying parameters. These parameters can be either structural parameters or other exogenous processes (technologies) showing the specific characteristics of individual sectors. From the perspective of monetary policy analysis and forecasting, it seems more convenient to assume that the structural parameters are stable and use sectoral technologies owing to their aggregate form. In this work, we confirm the previous results but on the second-order approximated model. We add that parameters capturing import intensity drift even in framework with added technologies. We also analyse the source of such drifting through decomposition of drifting parameters into observables. We found out that their drifting is mainly caused by export and import prices and exchange rate changes. We also confirm that the technology capturing Balass Samuelson effect is, at least in its cyclical component, a reflection of time-varying import intensity parameters.
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