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DSGE Models with observation-driven time-varying volatility

Giovanni Angelini and Paolo Gorgi

Economics Letters, 2018, vol. 171, issue C, 169-171

Abstract: This paper proposes a novel approach to introduce time-variation in the variances of the structural shocks of DSGE models. The variances are allowed to evolve over time via an observation-driven updating equation. The estimation of the resulting DSGE model can be easily performed by maximum likelihood without the need of time-consuming simulation-based methods. An empirical application to a DSGE model with time-varying volatility for structural shocks shows a significant improvement in the accuracy of density forecasts.

Keywords: DSGE models; Score-driven models; Time-varying parameters (search for similar items in EconPapers)
JEL-codes: C32 C5 (search for similar items in EconPapers)
Date: 2018
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