Good morning,

I have to do this exercise, but I don’t know where to start.

If anyone knew how, it would save my life.

Thanks a lot to those who will try to help me.

exercise.pdf (215.2 KB)

Good morning,

I have to do this exercise, but I don’t know where to start.

If anyone knew how, it would save my life.

Thanks a lot to those who will try to help me.

exercise.pdf (215.2 KB)

First, you need to derive the first order conditions of the modified model. Here, only the FOC for capital should change relative to what is given in Section 2. The steady state will not change.

Then Implement the steady state and the equations in Dynare. For that, you will need to assign values for the parameters. You could e.g. start with the values in Gali’s textbook or the values in Smets/Wouters (2007). The biggest problem is that I am not aware of any paper that has the same type of capital adjustment costs. Thus, pick any value for \gamma_K, e.g. 2.

Thank you very much for your valuable advice. I try to carry out the exercise following your instructions and I will let you know.