7

When is a model really weak? A model is an abstraction of reality, to explain a part of it. A model is weak when it cannot explain what it's supposed to be explaining. Just adding features to a model has no intrinsic good. It's much different from a fruit salad, where usually, an increased variety in fruits will lead to a better taste. Here, adding more ...


5

It's from King and Rebelo (2000) "Resuscitating Real Business Cycles". Here is a link to the NBER working paper version. The graph is in Figure 8 on p.94.


2

Try to give a look at what happens to inflation's IRF. If it stays positive for the whole horizon of the IRF then simply prices have increased over time at the inflation rate. I guess that any non-degenerate price level (nominal!) is compatible with such model structure, as its system is written down in growth rates, as that's what loglinearised variables ...


2

The only reason I can see right now could possibly be pedagogical. While that term does indeed just equal zero, there could be generalizations where the agent works a high amount with probability $\tau$ and a low, but positive, amount with probability $1-\tau$. In this case, the term would still go through. There are also plenty of functional forms that ...


2

A napkin theoretical exploration of the issue, to find possible directions to look for explanations, could go like this: According to the paper, the volatility of output and productivity has fallen. So for the correlation to have gone down, the covariance must have fell steeply. Modeling output as $$Y = AK^a(h\cdot L)^{1-a}$$ where $h$ is the "effort ...


2

I think what you are looking for is a standard RBC-model. Because the main step, going from RBC to New Keynesian, is to include Calvo pricing among other things. This is covered in many textbooks like Gali's, where he first introduces the RBC model and then moves on to the New Keynesian setup.


2

Consider the risk free steady state. In that situation the Euler equation becomes: $$ \left(\frac{C_{t+1}-b \overline{C_{t}}}{C_t-b \overline{C_{t-1}}}\right)^{-\sigma}=\frac{1}{\beta \cdot (1+r)}$$ Which implies $$ \Rightarrow \ln[C_{t+1}-b \overline{C_{t}}] -\ln[C_t-b \overline{C_{t-1}}] = \frac{\ln[\beta] + \ln[1+r]}{\sigma}$$ Assume that in the non-...


1

As DoubleBass says basic New-Keysian model with fully flexible prices is RBC model, I'd just add that if you have already the set-up of Calvo and want to convert it to fully flexible prices you need to set the share of firms that cannot change prices to zero (i.e. if $\lambda$ is the share of firms that cannot change their prices in $t$ then set it to zero). ...


1

It is not possible ex-ante, it's all about: economic interpretations, i.e., economic schools of thought expectations on central banks' next moves, political/ideological views, the (hidden and/or unconscious) emerging willingnesses to induce self-fulfilling prophecies ... hence the debates that take place here and there. Whether a recession is cyclical or ...


1

The distinction is between "nominal" and "real" recessions and booms. Real business cycle theory was developed to point out the fact that variations in employment and hours could occur even in an economy where markets were working competitively and there were no pricing frictions. In the RBC world, recessions and booms are driven by "real" factors: ...


1

By re-indexing all investment projects in the form of $s_{J,t}$, I get the following two equivalent constraints \begin{align} c_t+y_{t+1}-y_t&\leq f(k_t)-\sum_{i=1}^\infty\varphi_j s_{J,t-(J-j)} % Resource Constraint \\ k_{t+1}&=(1-\delta)k_t+S_{J,t-(J-1)} %Law of motion for capital formation \end{align} Hence, the Lagrangian for the maximization ...


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