Dear all,
I’m currently trying to replicate the baseline model in Gali & Monacelli (2016): Understanding the Gains from Wage Flexibility: The Exchange Rate Connection, link: crei.cat/wp-content/uploads/ … 2016-1.pdf
It’s actually a pretty standard New Keynesian small open economy model with nominal wage rigidity. First, they simulate a temporary payroll-tax cut (AR(1)) and show the results in Figure 1a. My GM_2016.mod file correctly replicates the qualitative responses, but the magnitudes are way off. I checked everything several times, played around with different specifications and equations but I’m running out of ideas.
I would be very grateful for any suggestions, perhaps someone has had a look at the paper recently or replicated it, I don’t know what’s wrong.
I wanted to replicate Figures 1a, 2, 3 and 4, and I have worked quite a bit on this. I have a code for the welfare computations, and the technology responses are qualitatively correct for both monetary regimes, and for the currency union case the discount factor shock as well (magnitudes are only close), but the rest is off. Again, perhaps someone has had a similar problem or could offer some advice what I could try?
Any suggestions are very welcome!
Best regards
GM_2016_welfare.mod (5.17 KB)
GM_2016.mod (3.2 KB)