using dummy variables in dynare
Posted: Thu Mar 05, 2015 3:47 pm
This is maybe a bit different topic from the others seen here but I hope someone will be willing to provide some support.
I find Dynare to be, among other things, a very powerfull econometric softwer and I tend to use it sometimes in that context. Hence, I was wondering what would be the way to go about
introducing a dummy variables (impulse and shift) in the model one would like to estimate? For example, I have set up a small model for estimating output and unemployment gaps exploiting the Okuns law and Phillips curve relationships (this is a rather standard approach). Then I have estimated it using a Bayesian approach. Everything seems fine.
However, now I would like to introduce an impulse dummy for the increase in VAT rate in the Phillips curve. What I have done is that I have defined another endogenous variable tax_dum, and in the model block I have tax_dum = e1, where e1 is just an exogenous shock with some small variance. Then I have declared tax_dum as a observable variable.
It works of course but does anybody have any opinion about the validity of this approach? And what would be the way to go if one would like to introduce a shift dummy variable in the model (deterministic structural break)? For example, if I want to have y(t) = c_1 + b*x(t) for t <= t0 and y(t) = c_2 + b*x(t) for t > t0. How would one set it up in Dynare?
Any help would be highly appreciated!
I find Dynare to be, among other things, a very powerfull econometric softwer and I tend to use it sometimes in that context. Hence, I was wondering what would be the way to go about
introducing a dummy variables (impulse and shift) in the model one would like to estimate? For example, I have set up a small model for estimating output and unemployment gaps exploiting the Okuns law and Phillips curve relationships (this is a rather standard approach). Then I have estimated it using a Bayesian approach. Everything seems fine.
However, now I would like to introduce an impulse dummy for the increase in VAT rate in the Phillips curve. What I have done is that I have defined another endogenous variable tax_dum, and in the model block I have tax_dum = e1, where e1 is just an exogenous shock with some small variance. Then I have declared tax_dum as a observable variable.
It works of course but does anybody have any opinion about the validity of this approach? And what would be the way to go if one would like to introduce a shift dummy variable in the model (deterministic structural break)? For example, if I want to have y(t) = c_1 + b*x(t) for t <= t0 and y(t) = c_2 + b*x(t) for t > t0. How would one set it up in Dynare?
Any help would be highly appreciated!