Hi, I finally constructed an RBC model with 3 sectors tradable goods, nontradable goods, and final goods. There are a few extensions from standard open economy RBC model. There are two financial frictions: a costly banking sector and working capital constraint for firms. It is a stationary model with no trend growth and there is no inflation in the model.
Now I want to estimate the model. This will be my first estimation attempt so sorry for my trivial questions in advance. I know that there should be as many observable variables as shocks. I have six shocks in the model and I will have measurement error so I choose 7 observables: tradable sector production, nontradable sector production, tradable sector investment, nontradable sector investment, world interest rate, domestic interest rate, foreign debt.
My question is regarding the preparation of the data. Should I use per capita or level production, and should I detrend the data? Since there is no trend growth should I use level production or demean it? Regarding interest rates, should I use nominal or real interest rates?
Any help would be appreciated…