Dear professor jpfeifer.
In my paper, there are 13 shocks(3 external shocks, 10 domestic shocks) and I regroup them into external shocks and domestic shocks. I have got the results of both shock decompositions and variance decompositions. I am really confused on the high contributions of external inflation shock, the contributions of external inflation shock are more than 50% for almost all the variables( The variables are also in real, for example, real per capita output) I select, that also made the total external shocks’ contributions high. However, that doesn’t make sense for me. Is it because the construction of my model? or the use of one price law in steady state?
really hope for your reply and always grateful to you.
fig 1. shock decomposition of real per capita output
fig 2. variance decomposition
This is not something that people are likely to help you with. Finding out why particular shocks matter in a correctly specified and implemented model involves deep familiarity with the model and its workings.
In your case, you did not even state for which country you are conducting the exercise. That being said: did you check how volatile foreign inflation actually is? If there is crazy high volatility and strong pass-through, that might explain it.
Really thank you for your reply, professor. In my paper, domestic country is China, foreign country is the rest of world. I am confused on the high contributions of external inflation shock. I got a review on my paper: The reviewer said for china, my result of external shocks account for half of China’s real per capita output sometimes is a hard sell. and so I want to get a intuitive opinion from you if my result is really reasonable or not?