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Interpreting Structural Shocks and Assessing Their Historical Importance

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  • Herrera Luis

    (IRES, Université catholique de Louvain, Ottignies-Louvain-la-Neuve, Belgium)

  • Vázquez Jesús

    (Universidad del País Vasco (UPV/EHU), Bilbao, Spain)

Abstract

We revisit three major US recessions through the lens of a standard medium-scale DSGE model (Smets, F., and R. Wouters. 2007. “Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach.” The American Economic Review 97: 586–606) augmented with financial frictions. We first estimate the DSGE model using a Bayesian approach for three alternative periods, each containing a major US recession: the Great Depression, the Stagflation and the Great Recession. Then, we assess the stability of structural parameters, and analyze what frictions were particularly important and what shocks were the main drivers of aggregate fluctuations in each historical period. This exercise can be understood as a test of the standard New-Keynesian DSGE model with financial accelerator in closed economies. We find that the estimated DSGE model is able to provide a sound explanation of all three recessions by closely relating both estimated structural shocks and frictions with well known economic events.

Suggested Citation

  • Herrera Luis & Vázquez Jesús, 2023. "Interpreting Structural Shocks and Assessing Their Historical Importance," The B.E. Journal of Macroeconomics, De Gruyter, vol. 23(1), pages 375-425, January.
    • Handle: RePEc:bpj:bejmac:v:23:y:2023:i:1:p:375-425:n:15
    DOI: 10.1515/bejm-2021-0244
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    More about this item

    Keywords

    medium-scale DSGE model; financial frictions; structural shocks; major recessions;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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