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Identifying Economic Shocks in a Rare Disaster Environment

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Abstract
We propose a new approach to efficiently estimate and analyze DSGE models subject to large shocks. The methodology is applied to study the macroeconomic effect of these unusual shocks in a new Two-Sector model with heterogenous exposure to the COVID-19 pandemic across sectors. We solve the model nonlinearly and propose a new nonlinear, non-Gaussian filter designed to handle large shocks and identify their source and time location. Monte Carlo experiments show that the estimation and identification of large shocks is feasible with a massively reduced running time. Empirical results indicate that the pandemic-induced economic downturn can be reconciled with a combination of large demand and supply shocks. Finally, we present a set of counterfactual experiments to filter out potential demand and supply shock complementarities, and perform a robustness exercise to check the sensitivity of the model parameters to large shocks.

Suggested Citation

  • Luisa Corrado & Stefano Grassi & Aldo Paolillo, 2021. "Identifying Economic Shocks in a Rare Disaster Environment," CEIS Research Paper 517, Tor Vergata University, CEIS, revised 18 Jul 2024.
  • Handle: RePEc:rtv:ceisrp:517
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    References listed on IDEAS

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    Cited by:

    1. Ghosh, Saurabh & Gopalakrishnan, Pawan & Ranjan, Abhishek, 2022. "Technology shocks, banking sector policy, and the trade-off between firms and households," Economic Analysis and Policy, Elsevier, vol. 75(C), pages 664-688.
    2. Cardani, Roberta & Croitorov, Olga & Giovannini, Massimo & Pfeiffer, Philipp & Ratto, Marco & Vogel, Lukas, 2021. "The Euro Area's pandemic recession: A DSGE interpretation," JRC Working Papers in Economics and Finance 2021-10, Joint Research Centre, European Commission.

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    More about this item

    Keywords

    COVID-19; DSGE; Large shocks; Nonlinear; Non-Gaussian;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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