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

2021/07/12 by Giacomo Bormetti, Bormetti, Giacomo, Fulvio Corsi +1
Economics, Econometrics and Finance · #Market Dynamics and Volatility #Italy: Economic History and Contemporary Issues #Monetary Policy and Economic Impact

paper · pdf · doi:10.48550/arxiv.2107.05263

Abstract

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

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