Historical Decomposition

[qazi.haque]

Hi there,

I was wondering whether it is important to do Cholesky decomposition of the variance-covariance matrix when we do historical decomposition.

Thanks for your taking your time to answer.

Cheers,
Qazi

[jpfeifer]

Dear Quazi,
yes, if you have correlated structural shocks, the covariance matrix needs to be decomposed to assign the effect on the endogenous variables to a particular shock. Dynare will use a Cholesk decomposition for this purpose.