Question on Gali_2008_chapter_5_commitment.mod

Hello, I am confused about the way natural output is defined in the mod file “Gali_2008_chapter_5_commitment.mod” by Professor Pfeifer. Right now it is the same as efficient output, but I thought with cost-push shocks they should be different. I found that in the same mod file for the 2nd edition of Gali’s book (2015) ("Gali_2015_chapter_5_commitment.mod), natural output is defined implicitly as “u = kappa*(y_e - y_nat)”. However, when I plug this condition in to Gali_2008_chapter_5_commitment.mod, the results don’t make sense.

Related to that, I found that in the 2015 file if I change the definition of natural output from the implicit definition to the definition of efficient output (as is currently the case in the 2008 file), the results are identical to the original ones (when natural output is defined implicitly). I am also curious as to why this is the case.

Thank you in advance!

Just a short remark: Gali (2015) chapt 5 seems to correct some notations and definitions in Gali (2008). So I would like to follow Gali (2015).

I’m a layperson. Please wait Prof. Pfeifer’s formal reply :grin:

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I also haven’t explicitly compared the two editions and currently don’t have access to the books. But this most probably means that I have made a mistake in the 2008 version. If I remember correctly, no formula for natural output has been provided in that chapter.

Thanks for your reply! Indeed there is no explicit formula for natural output in that chapter so I guess defining it implicitly with cost push shock and efficient output, as you did in the code for the 2nd edition of the book, is the right way to go.