Flexible economy and sticky price economy

General DSGE Modeling
1

hi! I am reading sw(2007) and I find that the model equation in the code include 2 parts, flexible economy and sticky economy, i want to ask what is the difference between the two economy. which parameters in the flexible economy are set to 0?thanks a lot

2

Hi, As the name suggests itself in the flexible economy the price and wages are flexible, so the Calvo price/wage setting equations are removed. I do not remember how it is done in sw2007 mod file, but it is not simply done by changing the value of the Calvo probabilities. This should be explained in the paper, or perhaps in previous versions of the SW model.

Best,
Stéphane.

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3

Yes, the Calvo probabilities are set to 0 so that natural output is obtained. This can also be seen under “natural output” in the Gali (2015) textbook.

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