Could any one explain me why in the JPT 2010 “Investment shocks and business cycles” the authors set up the model comprises of two blocks equilibrium conditions as noted in page 12 of technical appendix. That is they derive a system of 16 equations and said that “…together with the 15 equations describing the evolution of the economy with flexible prices, flexible wages and no markup shocks,…”. The whole system have 31 endogenous variables: …yhat, yhatstar, Lhat, Lhatstar,…].
The model is straight forward but I do not understand why they do so
For your reference I attach the paper and appdx.
Thanks a lot.
[JPT 2010] Investment shocks and business cycles.pdf (311 KB)
[JPT 2010] Investment shocks and business cycles (Appendix).pdf (409 KB)