Comparing estimated structural models of different complexities: What do we learn?

José Maria and Paulo Júlio

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: We estimate various models of different complexities for the Portuguese economy. These differ along three key dimensions: the disaggregation of the final goods structure, the existence of a financial sector, and the complexity of the fiscal environment. Simpler models do get the key bullet points of storytelling right, but exacerbate the role of existing mechanisms. More complex models adress this problem, at the cost of greater potential mispecification. A more complex fiscal environment introduces a rule that adjusts labor taxes according to deviations in the fiscal balance from a target level. This mechanism may cushion or enhance the effects of other disturbances. The financial sector originates important differences in impulse responses, driven by inflationary domestic pressures that trigger a reduction in the real cost of credit. Many estimation outcomes are largely indistinguishable across models, such as smoothed shocks, standard deviations, and correlations with output growth.

JEL-codes: A C11 C13 E20 E32 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-fdg and nep-mac
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