Hi all I have a question regarding shocks. how can one interpret a shock to the first order condition of firm in a rbc framework?
For example, marginal revenue = marginal cost + shock.
Isn’t this a simple cost push shock?
you are right in New keynesian models. But I fail to mention the details. is it possible to have a cost push shock in rbc model? say for tradable goods, where marginal revenue is foriegn prices?
Hi econ26,
Yes, it is possible.
Start from the pricing rule
\frac{P_{it}}{P_t}=\frac{\epsilon}{\epsilon-1}MC_t
or simply
MC_t=\frac{\epsilon-1}{\epsilon}.
by the symmetry due to flexible prices in RBC.
If you define the mark-up \mu=\frac{\epsilon}{\epsilon-1}, you can think of the mark-up as time-varying, i.e. \mu_{t}, due to changes in the substitutability among good varieties, and specify a process for it.
A standard formulation would be to have the current mark-up fluctuate around its steady-state level \bar\mu with persistence (1-\rho) and around its lag with persistence \rho, inclusive of a random innovation.
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