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Angelini, G. and Gorgi, P. (2018). DSGE Models with observation-driven time-varying volatility Economics Letters, 171:169--171.

  • Journal
    Economics Letters
View publication

This paper proposes a novel approach to introduce time-variation in the variances of the structural shocks of DSGE models. The variances 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 empirical application to a DSGE model with time-varying volatility for structural shocks shows a significant improvement in the accuracy of density forecasts.