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Evaluating Historical Episodes using Shock Decompositions in the DSGE Model
Author:
Zamid Aligishiev
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,
Michael Ben-Gad
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, and
Joseph Pearlman
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Series:
IMF Working Papers
Volume/Issue:
Volume 2025: Issue 051
Language:
English
Publication Date:
07 Mar 2025
DOI:
https://doi.org/10.5089/9798229006736.001
ISBN:
9798229006736
ISSN:
1018-5941
Pages:
38
Keywords:
DSGE model; Shock Decomposition; Financial Frictions; Fiscal Policy; copyright page; influence of the shock; monetary policy shock; differencing method; decomposition method; Sovereign bonds; Central bank policy rate; Private investment; Public investment spending; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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We present alternative methods for calculating and interpreting the influence of exogenous shocks on historical episodes within the context of DSGE models. We show analytically why different methods for calculating shock decompositions can generate conflicting interpretations of the same historical episodes. We illustrate this point using an extended version of Drautzburg and Uhlig’s (2015) model of the U.S. economy, focusing on the periods 1964–1966, 1979–1987, 2006–2009, 2016–2020 and 2020–2023. We argue that the best method for analyzing particular episodes is one which isolates the influence of the shocks during the period under consideration and where the initial conditions represent the system’s distance from balanced growth path at the beginning of the episode.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund