# DSGE with search frictions and commodity price shocks

Hi!
I have an issue with a DSGE that im trying to build. Is an RBC-SOE model with labor market frictions. The main issue is that, looking at the policy and transition functions output, the commodity price shock affects negatively the household consumption, and that the agents wages do not affect the consumption. I can’t really identify what is wrong here. Below is attached the mod file. I have to add that H and L letters index that there are heterogeneous workers, where H is for high-skilled, and L is for low-skilled.
I appreciate any help !

pcu3_sim1.mod (3.5 KB)

I forgot to mention that the commodity price shock is called pCO in the mod file

1. `c+kH*vH+kL*vL+pCO*CO=Y;`
2. let `cc = (kH*vH+kL*vL+pCO*CO);`
3. so `c = Y - cc`
4. You can see that cc is more than Y in your model, so c is negative.
5. Why cc = (kHvH+kLvL+pCO*CO) > Y; is something you have to look into. I think it is parameter issue. Just reduce kH and kL.
6. How did you know wages do not affect consumption if I may ask?

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Indeed, it was a parameter calibration issue. I’m now trying to learn which is the correct calibration in order to obtain reasonable results.

Regarding your question in point 6.: if you look the output for “POLICY AND TRANSITION FUNCTIONS”, there is how wH(-1) and wL(-1) affect every endogenous variable in the model. In this regard, one may look that the coefficient for wH(-1) and wL(-1) over consumption (c) is zero (0). Although, I’m thinking thay maybe i’m mistaken, because wages have to affect consumption contemporaneously, not with a lag.

Which equation(s) in your model represents/captures intratemporal optimality condition?

You mean the Euler equations?

No.

1. FOC with respect to consumption
2. FOC with respect to labor

FOC w/r to consumption is the first one in the model block.

FOC w/r to labor is not explicitly written in the model, but is considered in the Nash bargaining wage equations, described by wH and wL in the model block

oh ok.

Well, there is no law of motion for wH and wL in the model. I mean wH(-1) has no effect on wH, and wL(-1) has no effect on wL. So wH(-1) and wL(-1) cannot affect c which depends on wH and wL.