DSGE conditional forecast - A drop in GDP growth

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Hector Herrada

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Jan 22, 2014, 4:12:20 PM1/22/14
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Hi, I understand how to perform conditional forecasts using the short rate fixed (0 stdev in the policy shock) to analyze how the economy reacts in an unanticipated way, for example. It is not clear to me, however, how to approach a scenario in which GDP growth falls 1%, for example. I was wondering how do you guys handle the exogenous shocks in the model (i.e. which shocks do you force to have 0 stdev?). What do you do in practice?

Thanks!

Hector


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