Dear all,
dear Johannes,
I just wanted to ask you two quick questions regarding the measurement equations of inflation and interest rates.
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In Johannes’ “Guide to Specifying Observation Equations for the Estimation of DSGE Models”, you show how to demean the gross interest and inflation rates. Why is it for inflation (equation 39):
... - log[mean(Pi_data)]
and for interest rates (equation 42):... - mean[log( 1 + R_data/(4-100) )]
Why is it not in both cases the log[mean(xxx_data)], since they are both gross rates? -
My model is entered nonlinearly into dynare, and inflation and the interest rate are gross rates. Let’s say I want to keep the mean in one of the observables, would I then just write the observation equation as:
inflation_data = log(inflation)
This would mean I just feed in log inflation without demeaning it. This question is based on a post I read, where Johannes said that from his experience it is sometimes beneficial to feed in one undemeaned series. Or is not necessary to take the log in the mod file?
Many thanks for your help!
Rob