GDP deflator and calibration

[hipa]

Good morning,

I’m trying to calibrate the model. I encounter an issue with the capital-output ratio.
a) If I take the GDP deflator for K and Y series, I get a long -run ratio of 4.4 (from 1985-2018) while this ratio is at 5 in 2018, which gives me a problematic trending ratio.
b) If I take actual real values from national account, I get a long-run ratio of 5.5 while the ratio is at 5 in 2018.

Should I transform all my nominal values from the same deflator as Smets et Wouters (2007)?
If so, the capital BGP value would be at 4.4 in endval, but in initval it would be at 5. The simulation would force capital to diminish through time from 5 to 4.4, which is troubling. Should I not specify an endval block? Or should I fix my trending ratios at 2018 actual values, and the rest according to long-run mean?

Thank you.

Best regards

[jpfeifer]

What you describe is known as capital deepening. See

А model without balanced growth

There are a two issues here: Do you think that the non-balanced growth is a “steady state” feature or something that happens during the transition to a balanced growth path (e.g. catch-up growth)? I do not have much experience with models of the first class, featuring things like generalized balanced growth paths. Note also that countries like the US feature some (moderate) degree of capital deepening that is very hard to model in one-sector economies, but people consider this still to be cons…

It is mostly caused by the decline in the relative price of investment. There is no general rule how to deal with this.