Real Business Cycles in a Small Open Economy Mendoza (1991)

General DSGE Modeling Replication Attempts
1

Hi, I am trying to replicate this article, and I have the following problems:

  1. The moments are very different from those presented in the article, but quite consistent, except for the following. The capital stock in my reply is very volatile and the interest payment is not very volatile and employment is not perfectly correlated with GDP.
  2. Investment is negatively correlated with GDP and savings.
  3. Productivity is not correlated as in Mendoza (1991).
  4. The IRF have a timing problem.

If I adjust the following I = K - (1 + delta) * K (-1) I have a positive correlation with GDP and savings, in addition, employment it correlates perfectly with GDP, and the timing problem is fixed, but the variables are still more volatile than the original and I still have trouble with the correlation between productivity and GDP.

I think that possibly the error is found in the modeling of exogenous autoregressive processes.
I would appreciate your cooperation with me to solve this, thanks in advance.

Mendoza_1991.mod (3.9 KB)
Mendoza_1991.pdf (43.4 KB)

2

You need to consider your variables in logs, i.e. in percent. Currently, you are looking at levels, which cannot be compared to the data.

3

Thank you very much! your comment was very helpful, I was starting to lose hope

4

Hi, I’m replicating the results of this paper. Therefore should i log-linearize every equations?

5

No, you should append auxiliary variables defining the logs.