Dynare examples: NK baseline

General DSGE Modeling Replication Attempts
1

Dear all,

I have been recently looking through NK_baseline_steadystate.m from stock examples folder.

  1. I am a bit confused, how was this expression derived (line 66)?
%set the parameter gammma1
gammma1=mu_z*mu_I/betta-(1-delta);

Why not just setting gammma1 to an arbitrary number that makes sense?

  1. Moreover, given this, am I right to say that return on capital is determined from the FOC w.r.t utilization rate?

Any suggestions would be helpful! Thanks.

2
  1. This is a steady state condition that utilization is normalized to 1 in steady state. If you were to set an arbitrary number that would not be true anymore.
  2. No, the return to capital is determined by the investment and the utilization FOC. Firms rent capital services. You need to know the utilization and the amount of capital to determine the return.
3

Dear Professor,

Much obliged for your response.
However, I am still confused how the expression for gamma1 is derived. Would you be so kind to point at something specific?

Since before I thought that utilization rate u=1 is just something we treat as given in the steady state, no need for specific normalizations and so on.

Looking forward to your response.

4

Have a look at the paper Fernandez-Villaverde/Rubio-Ramirez 2006 - A Baseline DSGE Model underlying the model. On page 24, they derive the condition.

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