Dear all,

I am estimating a closed New Keynesian economy that accounts for trend growth, which I model as a parameter that captures the long-run trend plus an exogenous shock that has no persistence as in professor Pfeifer’s “A Guide to Specifying Observation Equations for the

Estimation of DSGE Models” 2018 version. When preparing the data, I calculate hours worked per capita, which I assume has no trend. I include the log growth rate of hours worked per capita without a trend as the observation equation for hours worked. The observation equations for inflation and the nominal interest rate are log growth rates as in Section 5.3.2 of professor Pfeifer’s paper.

However, when trying to estimate the parameter that captures the long-term trend growth I am able to obtain an estimate for this long-run parameter, but the exogenous shock for trend growth fluctuates around -1, see “shocks_2021_09_15.pdf”. This indicates to me that there is a serious error in my model, as this is not a realistic result as the shock should fluctuate around zero.

One possible explanation could be that the mean of the log growth rates for hours worked is most likely to be positive, see “empirical_series_2021_09_15.pdf”.

In addition to these two figures, I attach the codes that I use for estimation. The estimation starts by running “FinIntGovDefMain.m”, and the time series for the estimation is given by the file “m_Data_Bayesian_BDREMS_1995_2007.mat”.

I would be grateful if someone could explain to me why I get these wrong results, and what I have to do to get sensible results.

FinIntGovDefMain.m (33.3 KB)

FinIntGov.mod (82.2 KB)

FinIntGovDynare.m (4.6 KB)

FinIntGov_steadystate.m (13.7 KB)

data_Bayesian_Spain.m (1.0 KB)

m_Data_Bayesian_BDREMS_1995_2007.mat (3.2 KB)

empirical_series_2021_09_15.pdf (8.5 KB)

shocks_2021_09_15.pdf (9.3 KB)