Calibration of Energy prices

General DSGE Modeling
1

Dear all,

I have a question about the calibration of prices. In my case energy prices.

The usual way to implement an energy price in a closed economy model is to use an AR(1) process and to set its steady-state value to 1.

My question is the following: does it make sense to target actual energy prices and setting the gas price in my model to 12 cents per kWh by setting e.g. P_{ss}^{G}=0.12 and the electricity price to 7 cents per kWh by setting P_{ss}^{E}=0.07.

2

It’s all about relative prices and relative shock sizes. You can easily recenter the AR processes around a different mean.

3

Thanks for your reply.

Yes, as you say, this is easily implementable. But, from an interpretation point of view, does it make sense to introduce a metric like “\textbf{cents per kWh}” in a DSGE model?

4

You as the model builder are the only one who can judge that. Usually, the scaling in models is chosen to satisfy calibration targets.