Hello, we are working on the DSGE model developed in Smets and Wouters 2003 for the eurozone in a bayesian setting. We would like to compute the reaction of GDP and inflation to **transitory and permanent** shocks to public spending.

We managed to estimate the fiscal multiplier with bayesian IRF from estimation command, but now we have struggle to compute the effect of a permanent and transitory shock.

- We don’t understand exactly how to study both the effect of a transitory and permanent shock with stock_simul. In order to do so we tried to set in the shock block the government spending shock as follow:

rho_g=0;

shocks;

var E_G;

periods 1:2;

values 0.1;

end;

and then call stoch_simul after the command estimation.

Does this compute the reaction to a shock of the variable E_G during period 1 and 2 ?

- From our research, it seems that a permanent shock can only be computed in a deterministic setting. Therefore we tried to call perfect_foresight_setup(); perfect_foresight_solver(); after estimation but we get this error:

The ‘simul’ statement is deprecated. Please use ‘perfect_foresight_setup’ and ‘perfect_foresight_solver’ instead.

ERROR: A .mod file cannot contain both one of {perfect_foresight_solver,simul} and one of {stoch_simul, estimation, osr, ramsey_policy, discretionary_policy}. This is not possible: one cannot mix perfect foresight context with stochastic context in the same file.

Therefore it seems that our model under rational expectation is incompatible with a deterministic framework.

We understand the economic intuition behind stochastic (rational expectation) and deterministic framework. However, we don’t know how to link the two : using the bayesian model estimated by Smets and Wouters in order to compute permanent vs/ transitory shocks.

Thank you in advance,