DSGE growth model and detrending


Dear users,

Do I have to detrend all my variables (variables expressed in labor efficiency units) to simulate a growth model? Or can I just express them in per capita?

Data and the model should be detrended in the same way, right?

Thank you in advance.


You need eleborate. What exactly are you trying to do? Estimation? Or just a simulation? If the latter, do you do a stochastic simulation or perfect foresight?


Thank you for your answer.

I am trying to do stochastic simulations of my model (and some forecasting). I also have some parameters to estimate from some observable variables.

Best regards


For stochastic simulations, your model needs to have a well-defined steady state. So you cannot have growth trends in the model, i.e. you need to write down a model with well-defined BGP and add the trend back later, e.g. by relying on first differences. The same applies for estimation, where you need to use a stationary transformation of the data.


That’s what I thought: detrending the model and the data.

So if I want nice graphs exhibiting growth trends, I have to do a deterministic simulation of my model ?

Thank you in advance.

Have a nice weekend


No, you need to work with the detrended model and later add the trend back. That is straightforward.


OK thank you very much.

Do you know a textbook for derivating the BGP with nested-production functions in an economy? I am having a hard time doing it and cannot find anything on the net.



Unfortunately, I am not aware of such a reference.


Thank you.

One last question: if I simulate my model from 2017 to 2035, will my steady state represent year 2035 (or 2017?), since it is the long-run state of my economy? I calibrate the values of my parameters on year 2017 representing a near to zero output gap.


“long-run” in this context (a linear model) means not a particular year, but rather the long-run average over time or where the economy is if there are no shocks happening.