IMF Working Papers

Evaluating Historical Episodes using Shock Decompositions in the DSGE Model

By Zamid Aligishiev, Michael Ben-Gad, Joseph Pearlman

March 7, 2025

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Zamid Aligishiev, Michael Ben-Gad, and Joseph Pearlman. "Evaluating Historical Episodes using Shock Decompositions in the DSGE Model", IMF Working Papers 2025, 051 (2025), accessed April 18, 2025, https://doi.org/10.5089/9798229006736.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We present alternative methods for calculating and interpreting the influence of exogenous shocks on historical episodes within the context of DSGE models. We show analytically why different methods for calculating shock decompositions can generate conflicting interpretations of the same historical episodes. We illustrate this point using an extended version of Drautzburg and Uhlig’s (2015) model of the U.S. economy, focusing on the periods 1964–1966, 1979–1987, 2006–2009, 2016–2020 and 2020–2023. We argue that the best method for analyzing particular episodes is one which isolates the influence of the shocks during the period under consideration and where the initial conditions represent the system’s distance from balanced growth path at the beginning of the episode.

Subject: Central bank policy rate, Expenditure, Financial institutions, Financial services, National accounts, Private investment, Public investment spending, Sovereign bonds

Keywords: Central bank policy rate, Copyright page, Decomposition method, Differencing method, DSGE model, Financial Frictions, Fiscal Policy, Global, Influence of the shock, Monetary policy shock, Private investment, Public investment spending, Shock Decomposition, Sovereign bonds

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