Exogenous variables

[jefbref]

I’m sorry to bother you all with what should be a silly question. I have looked at the reference manual and the user guide, but I still don’t exactly understand something.

When I have an exogenous variable to my model, I intuitively modelled it as varexo. But as I looked at the manual, I found (dynare.org/manual/index_18.html):

In a stochastic framework, the exogenous variables take random values in each period. In Dynare, these random values follow a normal distribution with zero mean, but it belongs to the user to specify the variability of these shocks. The non-zero elements of the matrix of variance-covariance of the shocks can be entered with the shocks command. Or, the entire matrix can be direclty entered with Sigma_e (this use is however deprecated).

If the variance of an exogenous variable is set to zero, this variable will appear in the report on policy and transition functions, but isn’t used in the computation of moments and of Impulse Response Functions. Setting a variance to zero is an easy way of removing an exogenous shock.

Does that mean that if I have an exogenous variable (in the economic sense) that has a steady state value different than zero I should use it as an endogenous variable in my .mod file? Thanks in advance.

[jpfeifer]

No, just add a constant, i.e. a number or a fixed parameter to shift the mean. If epsilon is normal with mean 0, then 2+epsilon is normal with mean 2.

[jefbref]

I am a little late because of couple of days of vacation without internet, but thank you jpfeifer.

If I understand your answer, exogenous variables (in the economic sense) are modelled as a random variable with zero (or as you mentioned I can change the mean). But if this variable allows a budget constraint to be held, should I still consider it as a varexo in my .mod code?

I apologize in advance if my question might be obvious to advanced users.

[jpfeifer]

If your “exogenous” variable reacts to something in the model, it is not exogenous. Or what are you thinking about?

[jefbref]

I’m trying to implement the New Area Wide Model of the ECB. In their paper, authors state that the purchase of public consumption is determined exogenously (the fiscal authority section in the paper), but fiscal authority respects a constarint which is confusing me.
The new Area-Wide Model of the euro area - a micro-founded open-economy model for forecasting and policy analysis.pdf (1.82 MB)

[jpfeifer]

Public consumption is an exogenous variable in the model. What reacts to obey the government’s intertemporal budget constraint is lump sum taxation T_t, which is an endogenous variable.

[jefbref]

Thank you very much jpfeifer.