We are trying to replicate the 2007 paper by Galí, Vallés & López-Salido, “Understanding the effects of government consumption on consumption”, which seeks to model the possible crowding-in effects from government spending shocks on private consumption.
Modelling the authors’ case for perfect labor markets, we seem to find results relatively close to those of the original paper.
However, it seems the model becomes unstable (Blanchard-Kahn conditions not verified) when we try to estimate the case for imperfect labor markets. We found this thread, where someone else seemed to have the same issue.
The crowding-in effects from the government spending shock are greatly affected by the labor market-situation, and relatively non-existent for the perfect labor markets. We are in relatively dire need of getting the imperfect labor markets-case to work for our project, and it can hardly be a mistake on Galí’s side? Their results for the imperfect case are super relevant for us, but we are simply not able to recreate them.
Are anyone aware of this issue or have managed to solve it?
Thanks a lot in advance!
Gali_2007_v2.mod (2.8 KB)