No Hump-Shaped Inflation Response under Rotemberg Pricing (Even with High Indexation)

Stochastic simulations
1

Hello all,

I’m calibrating a simplified NK model (without capital) using Rotemberg pricing with price indexation. I’m still in the pre-estimation stage, just trying to validate that the model’s IRFs exhibit key features we see in the data.

I’ve shut off all shocks except the monetary policy shock, and introduced price indexation with γ=0.9, alongside a relatively high adjustment cost ϕp =100 , in order to mimic the sluggish response of inflation typically observed after policy changes.

However, in the IRFs, inflation jumps on impact and returns to 0, I don’t get any hump-shaped response.

Is this expected behavior under Rotemberg pricing? Or am I missing a key mechanism to generate more persistence (e.g. habit formation, etc.)?

The .mod file is attached, thank you so much!

nk_v3.mod (3.8 KB)

2

Usually, there is less indexing and more interest smoothing. That yields a somewhat more pronounced hump:
nk_v3.mod (3.8 KB)

3

Thank you professor!