Which Structural Parameters Are "Structural"? Identifying the Sources of Instabilities in Economic Models

Atsushi Inoue and Barbara Rossi

No 08-02, Working Papers from Duke University, Department of Economics

Abstract: The objective of this paper is to identify which parameters of a model are stable over time. Existing procedures can only be used to test whether a given subset of parameters is stable, and cannot be used to find which subset of parameters is stable. We propose a new procedure that is informative on the nature of instabilities affecting economic models, and sheds light on the economic interpretation and causes of such instabilities. Furthermore, our procedure provides clear guidelines on which parts of the model are reliable for policy analysis and which are possibly mis-specified. Our empirical findings suggest that instabilities during the Great Moderation were mainly concentrated in Euler and IS equations as well as in monetary policy. Such results offer important insights to guide the future theoretical development of macroeconomic models.

Keywords: Instability; Model Evaluation; Great Moderation (search for similar items in EconPapers)
JEL-codes: C22 C52 E32 E52 E58 (search for similar items in EconPapers)
Pages: 39 Pages
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-ecm and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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