Good afternoon everyone,
I would like to know what is the mainstream way to calibrate the factor share and substitution elasticities in a “growth dynamic general equilibrium model” (deterministic). I have two options:
Calibrate my factor shares (and other parameters, and steady state values for endogenous variables) on long-run averages from 1978 to 2017 and estimate my elasticities of substitution on 1978-2017 time series.
Calibrate my factor shares on the year 2017, which has a (nearly) zero output gap, so we can define it as the steady state of the economy to reproduce, and my elasticities on 1978-2017 time series. I personally prefer that one because it allows me to have “actual” steady state values for endogenous variables and parameters reflecting the current state of the economy I’m studying. The first option would underestimate or overestimate some steady state values as it takes long-run averages from 1978 to 2017.
Thanks in advance.