Dererministic Shock

Hi guys, quick question.

I have a deterministic model and I have to simulate a specific path for the exogenous variables. I can do that by simulating a sequence of permanent shocks using as a starting value the outcome of the previous simulation, but then the model is not solved under perfect foresight since at date t agents expect the exogenous variable to be at level t forever, while at t+1 it will increase again. Is there a way to specify a path for the exogenous variable so that agents are not constantly surprised every period?


No, if the shock is an exogenous variable agents will always be ‘surprised’. Unless you specify the shock as a news shock. In that case agents are not surprised when the shock materializes but when the shock is announced.

Thanks rteconomics. How do I specify a news shock?

TWell, the easiest way is this:

in this way the shock is ‘announced’ at (t-1) but materializes at time t. Agents react at (t-1) and not at t.