I have a Gali-Monacelli (2005) model with 2 small open economies (that are symmetrical in every way except for different productivity AR(1) processes) and 1 large, exogenous economy. I want to research the benefits of policy coordination in the face of world output shocks. I have 2 questions:
For the different productivity processes, I want them to have the same variance and persistency, but I want them to have different means. Is there a way to do that inn a log-linearised model? I unfortunately whether or not my variance should be in percentage terms relative to the mean or in absolute terms.
How would I simulate a recession in the large economy’s output? Would simply introducing a 1 standard deviation shock do it or would I need to do something else?
If it makes things clearer, I am trying to stick as close as possible to Gali and Monacelli (2005).
Thank you very much for your time in advance!