Simulating Measurement Errors

[Dr. En Ami]

Does Dynare support simulating measurement errors?

[jpfeifer]

What do you mean with this? Measurement errors only make sense in the context of estimation where you have an observation equation of the state space form. If you want to simulate a system with something you want to interpret as measurement error using stoch_simul, you have to do the following. Define your regular model. Say you want measurement error on output y. Then define a new variable (say y_obs) and a structural shock that is your measurement error and define an additional equation

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y_obs=y+eps_meas_y;

y_obs now is your observed variable with measurement error. The underlying economic variable y will not be affected by the measurement error. When simulation the model, y_obs will be simulated including the measurement error shock.

[Dr. En Ami]

That is exactly what I meant. Thank you.