I have got a few questions regarding the setup of SW(07) paper.
- ( see figure "aggregator) The paper mentions that in SW (07), the Dixit-Stiglitz aggregator in the intermediate goods and labour market is replaced by the more general aggregator developed in Kimball (1995). However, there is an online appendix which assumes the following aggregator for the intermediate goods producers which still looks like a Dixit-Stiglitz . Is there a contradiction?
- (see figure “consumption”). In the househoods utility function, the parameter “sigma_c” (inverse of the elasticty of intertemporal substitution for constant labour ) is greater than 1. This however means households would enjoy working more hours and supplying labour indefinitely? I suppose SW(07) assumes that the labour in the current period brings utility whereas the labour in the next period brings disutility? Please could you confirm my understanding?
- ( see figure “sticky and flexible”). From the dynare code, it seems that to derive the flexible version, the MC ( negative price markup, - \mu^p_t) is set to 0, and then we solve for rental rate of capital rk_t from it). My question is, how to derive the inflation for the flexible economy? there is no equation for inflation for it.
- ( see figure “inflation”). The highlighted texts mention that " when we set the Calvo parameter to 0, equation (10) reduces to the familiar condition… My question is, would \pi_3 be infinity if divided thoug by 0? Is this the way to derive the inflation for the flexible version of economy?
Besides, if we set Calvo probability to 0, this means firms always get to reset their prices in each period, shouldn’t we also set indexation to past inflation \iota_p to 0 as well? As partial indexaiton only can be present when firms have to stick to their past prices.
- what’s the difference between New Classical model and Real Business cycle models. I suppose they all refer to flexible price and wage setting?
Thanks for your help in advance!