Dear Prof. Pfeifer,
Thank you for your reply.
I understand better now, I remember you have mentioned the same thing when I asked you about the observation equations in my model in the post linked below, and you said:
“Yes, those steady states [
y_obsandy]need to be roughly equal. Any deviation between the two concepts will need to be explained by shocks.”
I have since checked my steady state values, and it seems I may have been mistaken in judging them as “roughly equal.” For your reference:
| Variable | Steady State Value |
|---|---|
| y_obs | 0 |
| y | 1.8548 |
| r_obs | 0.01005 |
| r | 1.0101 |
| pi_obs | 0 |
| pi | 1 |
I also have the following observation equations:
y_obs = log(y) - log(y(-1))
r_obs = log(r)
pi_obs = log(pi)
where I have demeaned the growth rate in output. Also, pi and r in my model is the gross inflation and gross interest rates, respectively.
Do you think these values can be considered “roughly equal,” or should I treat the differences as problematic?
I have also attached the data if you deem that useful.
Thank you so much,
Using log-differenced GDP in a non-linear model with stationary output variable
Data:
data.xlsx (25.1 KB)