## How to set compound shocks in Dynare

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### How to set compound shocks in Dynare

Dear all,

I saw someone set combined -1% tech shock and 1% govenment expending shock as compound shocks to simulate a condition of expensionary fiscal policy during a depression. I want to know how to realize this in Dynare.

Actually, I wonder if it is really reasonable to set compound shocks in a DSGE model. In my opinion, IRF is to test how a shock would affect the whole system with other shocks being set to zero. And also, I doubt exogenous shocks could simulate the expensionary fiscal policy during a depression, since I think endogenous variables, e.g. govenment expenditure variable under a tech shock, will be enough to explain. One more exogenous shock at the same time could only make our dynamic general equilibrium model meaningless.

Since the paper I read is not that authoritative, I am not sure whether to believe it or not and seeking a right answer. Thanks in advance.

Clandy
Clandy

Posts: 2
Joined: Tue Mar 14, 2017 3:41 am

### Re: How to set compound shocks in Dynare

1. A code example for simulating a model with arbitrary shock matrices using the simult_-function is available at https://github.com/JohannesPfeifer/DSGE ... _model.mod
2. In a linear model (order=1), there is certainty equivalence. The IRFs to two shocks are equal to the sum of the IRFs to the individual shocks. There are not interaction effects here due to linearity. Thus, everything can be learned from IRFs to individual shocks and nothing can go wrong if you consider several shocks at a time.
3. Things are different in nonlinear models. IRFs are not unique anymore, but rather depend on the point in the state space where you compute the IRFs, which is why other shocks matter. You need to take a position on what the other shocks. are. Setting all other shocks to 0 can be seen as being as arbitrary as any other shock combination. People therefore typically rely on generalized IRFs (GIRFs) that integrate out all other shocks, i.e. you take an average over the other shocks.
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Johannes Pfeifer
University of Cologne
jpfeifer

Posts: 6940
Joined: Sun Feb 21, 2010 4:02 pm
Location: Cologne, Germany

### Re: How to set compound shocks in Dynare

Dear Jpfeifer,

Thank you so much for your reply. They are pretty useful !

Clandy
Clandy

Posts: 2
Joined: Tue Mar 14, 2017 3:41 am