Capital in VAR model

General DSGE Modeling
1

Dear All:
Greeting to all old members.
I have a simple Cash in the Advance model in a closed economy and after log linearizing, it became a VAR model of seven variables. There is one K_{t+1} and K_t and H_{t+1} and H_t, which is labor hours, in the var model, I have two problems here.

  1. It seems there is not exclusive physical capital data on Fred and other organizations. If no capital stock data for production function, then how would I proceed with the Var model?.
  2. I have been thinking so hard about the labor hours. I assume it is between 0 and 1, I also collected employment data from Fred, how will I normalize the employment data as between 0 and 1?.
    If anyone could help, I would really appreciate. I am new to this form and Dynare.
2

Dear muhtar,

  1. There is a direct mapping between investment and capital: I_t=K_t-(1-\delta)K_{t-1}, so what is usually used is data on investment.
  2. You can use hours worked.
3

Dear Cmarch:
Thanks for the quick reply.
So, I will extract gross fixed capital formation from Fred as an investment and use it directly as capital or by setting an initial value for K_0, then extract K_t?.
So, how will normalize the hours worked to between 0 and 1?.
Thanks.

4

@muhtar You need to elaborate what your are doing. Usually, DSGE models have a solution in the form of a restricted VARMA process in the observables. Why did you get a (seemingly unrestricted) VAR process after linearization, but before solving the model?

Also, it is unusual to estimate a model with the capital stock as an observable. Using investment is more common.

5

In K_t = I_t + (1-\delta)K_{t-1}, DYNARE sets K_{t-1} = K_{ss} (steady state capital) or K_{t-1} = 0. More likely steady state, but I wanna to be sure, meaning K_{t-1} is unique in DYNARE can’t be chosen outside the model? Or we can? Thanks.

6

What do you mean? How the initial period K_0 is set?

7

Yes, can one choose K_0 = K_{ss} or say K_0 = 0 or some other value in dynare.

8

Predetermined values can be set with histval for many purposes. See the Dynare manual for details. In estimation, the smoother can be used to infer to initial values.

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