This paper proposes a novel approach to introduce time-variation in structural parameters of DSGE models. Structural parameters are allowed to evolve over time via an observation-driven updating equation. The estimation of the resulting DSGE model can be easily performed by maximum likelihood without the need of time-consuming simulation-based methods. An application to a DSGE model with time varying volatility for structural shocks is presented. The results indicate a significant improvement in forecasting performance.
# 18-030/III (2018-03-30)
- Giovanni Angelini, University of Bologna, Italy; Paolo Gorgi, VU Amsterdam, The Netherlands
- DSGE models, score-driven models, time-varying parameters
- JEL codes:
- C32, C5