Atsushi Inoue, Chun-Hung Kuo, Barbara Rossi, 24 November 2014

The Great Recession uncovered the difficulties that economic structural models have in explaining the data. This column proposes a methodology that can help identify the sources of mis-specification by introducing exogenous processes. These exogenous processes are not structural shocks but processes that can improve the fit. The results indicate that including more labour and asset frictions in economic models could improve their performance.

Atsushi Inoue, Chun-Hung Kuo, Barbara Rossi, 24 November 2014

The Great Recession uncovered the difficulties that economic structural models have in explaining the data. This column proposes a methodology that can help identify the sources of mis-specification by introducing exogenous processes. These exogenous processes are not structural shocks but processes that can improve the fit. The results indicate that including more labour and asset frictions in economic models could improve their performance.

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