Dear Johannes,

In our DSGE model, we need to compare the deviation between the deviation between an economy and its frictionless state, we are wondering that regarding structural shocks, do all structural shocks equal zero in the frictionless economy?

Thank you very much and look forward to hearing from you.

Best regards,

Jesse

Hi Jesse,

typically, the frictionless counterpart of our NK model is an RBC model. This model is driven by e.g. technology shocks. When we think about the frictionless or natural environment of our models, then we typically assume that nominal rigidities like sticky prices or wages are turned off. This does not imply that all your shocks disappear.

What you mean is the steady state. By construction of the nominal rigidities these become non-binding in the steady state, when all shocks are turned off. Therefore, the steady state coincides with the natural environment, but once you turn the shocks on your model will leave this environment if it features e.g. nominal rigidities.

For further reference I would suggest Chapter 2 and 3 of Galí (2015).