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

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  • José R. Maria
  • Paulo Júlio

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.

Suggested Citation

  • José R. Maria & Paulo Júlio, 2022. "Comparing estimated structural models of different complexities: What do we learn?," Working Papers w202205, Banco de Portugal, Economics and Research Department.
  • Handle: RePEc:ptu:wpaper:w202205
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    References listed on IDEAS

    as
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    2. Christiano, Lawrence J. & Trabandt, Mathias & Walentin, Karl, 2011. "Introducing financial frictions and unemployment into a small open economy model," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 1999-2041.
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    More about this item

    JEL classification:

    • A - General Economics and Teaching
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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