First thank you for your previous guidance, I am grateful.
I plan to include 2020 macroeconomic data covering COVID19 period into my DSGE model, however, I find values of this period’s data is very extreme like outliers, I am wondering that do we stick to the assumption of no structural break/stable structure for DSGE model estimation? Do two quarters (2020 Q1 and 2020 Q2) extreme values for DSGE model matter in estimating DSGE models? for instance, will these two quarters’ extreme values cause misspecification/bias/inefficiency problems?
Thank you and look forward to hearing from you.
That is a tricky issue. It may be best to not include these data. Please refer to the recent work of Giorgio Primiceri https://faculty.wcas.northwestern.edu/~gep575/research.html
Thank you for your helpful guidance. But for 2008 Great Financial Crisis, we also include that period data without accounting for a structural break for 2008 crisis, why is data for COVID19 period an exception?
And 2 quarters data out of 254 quarters data is only a small proportion, will including the extreme 2 quarters data have serious effect upon model misspecification, estimation unbiasedness and efficiency?
For the GFC, there is for example the Stock/Watson paper (https://www.brookings.edu/bpea-articles/disentangling-the-channels-of-the-2007-2009-recession/) arguing that there was no structural break, just a bigger shocks. It is hard to argue the same for the COVID19-period. Also, the current GDP drop is bigger and faster than previous ones. With normally distributed shocks, this should pretty much never happen. Thus, these outliers will massively affect estimation.