DSGE growth model and detrending


#1

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.


#2

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?


#3

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


#4

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.


#5

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


#6

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


#7

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.

Best


#8

Unfortunately, I am not aware of such a reference.


#9

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.


#10

“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.