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Dear all,

I have built a model. My goal is to estimate the effect that exogenous trade shocks ( such as the creation of the EU or the entrance of China in WTO) in the real import and real export equations( endogenous in the model. I estimated them through an ardl equation) have on real gdp (endogenous, also with ardl ). I was thinking to use dummies as proxies for exogenous shocks in the real import and real export equations.Thus, I would estimate the effect these shocks have on real gdp growth through the real import and real export equation. Nevertheless, when I add these extra dummies in the equations in the different scenarios, the baseline equations of import and export also have these extra dummies. Consequently, I can not estimate the effect that these exogenous shocks have on the variables under research.

What would you suggest me to do? What is the best approach to tackle this issue?

Thank you in advance

So the typical way that modelers use the model object to analyze the effect of an exogenous shock is to impose the coefficients of the underlying equations are unchanged by the shock, and all that changes is the values of an exogenous variable.

If you wish to model a shock as a change in coefficient values in an equation (i.e. a change in relationship between variables rather than a change in variables), you're best off having two model objects, one with the original equations and the second with the new equations, then solving both and comparing the differences in the solution series.

Dear Sir/Madam

I would like to know whether using a dummy to simulate a shock is recommended. As I did not find any papers using this method.

Thank you