# Correlation between shocks

hi
how does one let shocks be correlated with each other in dynare?i would like to estimate the correlation between 2 shocks?

regards
estefan

Hi,

You have two possibilities :

(i) By declaring that you want two estimate a correlation in the estimated_params block (see the documentation at: dynare.org/manual/re29.html *).

or

(ii) By imposing a common factor representation of the shocks in the model block. For instance if you want to correlate e1 and e2, you have to declare these variables as endogenous variables and declare u1, u2 and u as exogenous variables. Then you just have two write (in the model block) :

e1 = u + u1 ;

e2 = gam*u + u2 ;

where gam is a parameter. The covariance between e1 and e2 is defined by the variance of the common factor (u) and parameter gam.

Best,
Stéphane.

NB: * new url

[quote=“pun_star”]hi
how does one let shocks be correlated with each other in dynare?i would like to estimate the correlation between 2 shocks?

regards
estefan[/quote]