Thank you for your previous guidance, I am grateful.
I have a question regarding modelling an economy over a period which has experienced significant changes but not a serious structural break, if I incorporate more structural shocks, will this help to improve model performance for estimating a model over a period with big changes, e.g. great financial crisis, COVID19.
Thank you very much and look forward to hearing from you.
I don’t know a definitive answer, but let me share my thoughts.
Your question is already full of inherent tensions. If there has not been a structural break, then the shocks you are considering to add were present all time. Given that you did not include them before, your model was misspecified all the time. For example, you could argue that there has indeed not been a structural break, rather there was always disaster risk, with a low probability of large events and that these events simply did not materialize before. Now for the first time we have such an event. But that implies that a disaster risk model would have been appropriate the whole time.
Now the question is how to explain the Corona crisis. You could go the route of shocks simply being bigger as previously discussed in
But then the question is whether these are simply realizations from the same distribution of whether the distribution has changed to make big shocks more likely. In the latter case, there is a structural break.