Negative supply shock

Dear dynare users,

I have a certainly trivial question about the interpretation of shocks.

The war in Ukraine has triggered a negative supply chain shock which has/will lower GDP growth in many developed countries e.g. Germany. For instance, the IMF has lowered its 2022 forecast for German growth from about 0.5 percentage points.

My question is the following: does it make sense to model this decrease in the forecasted GDP growth by the mean of a negative supply shock that decreases output by 0.5% in the model (the nature of the shock still needs to be determined)?


Hi alchi49,
Your question is very broad, there is no definitive answer to it. I would argue that the answer depends on your approach to solving two main empirical challenges. The first is that observed outcomes (decline in GDP) can happen due to several different (and maybe simultaneous) shocks (supply, trade, financial channel, monetary and fiscal policies), and it is always a challenge to identify these shocks. The second problem concerns the choice of the “correct model” to answer the question of interest. How many shocks does your model have? Can your model and your shocks account for the main channels through which the war affects growth? These are the questions you have to answer beforehand.

I would also search how the DSGE literature usually incorporates a “war shock” in the model.

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Thanks for your answer. You are right, I will first have a look at the literature.