Price level in RBC Models

General DSGE Modeling
1

Hi everybody.

My question is that in some articles about RBC models I can see the price level in household’s budget constraint but in some of the other articles in the literature researcher did not use price level in the model or for household’s budget constraint.

2

It depends if the budget constraint is expressed in real terms or nominal terms.

3

If it’s an RBC model, there should be no price level showing up, just relative prices. If there are multiple goods, sectors, or changes in the relative price of investment, then there are price terms showing up.

4

Dear Professor Pfeifer,

is this true also for DSGE models? I’m studying your dynare code that replicates Galí 2015 Chapter 3 (nonlinear model), and if I’m not wrong it contains the variable p (price level).

Thanks in advance,
Francesco

5

That model is a New Keynesian model, not a real business cycle model (RBC). In the former, you have meaningful movements of the price level.

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6

So, writing a New Keynesian model Dynare code in terms of prices instead of relative prices is correct, isn’t it? I mean, I’m not obliged to rewrite the standard intermediate firms optimal price condition, the price dispersion term, etc. in terms of inflation.

Thanks again,
Francesco

7

Inflation is not a relative price, but a change in a nominal price. That’s different. Most NK models only determine inflation uniquely, not the price level. That’s why you have a unit root in prices.

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