A Lucas Critique Compliant SVAR model with Observation-driven Time-varying Parameters

Giacomo Bormetti and Fulvio Corsi

Papers from arXiv.org

Abstract: We propose an observation-driven time-varying SVAR model where, in agreement with the Lucas Critique, structural shocks drive both the evolution of the macro variables and the dynamics of the VAR parameters. Contrary to existing approaches where parameters follow a stochastic process with random and exogenous shocks, our observation-driven specification allows the evolution of the parameters to be driven by realized past structural shocks, thus opening the possibility to gauge the impact of observed shocks and hypothetical policy interventions on the future evolution of the economic system.

Date: 2021-07, Revised 2022-02
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-mac and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2107.05263

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