Steady state growth rate parameter

General DSGE Modeling
1

Hello everyone,

I am trying to specify an observation equation for output as specified in “Shocks and Frictions in US Business Cycles” by Smets and Wouters (2007). If dy is the log difference of output (observable) and y are deviations of output in the model from the steady state, the observation equation takes the form

dy=y-y(-1)+gamma;

Where gamma is the steady state growth rate. Any idea on how can this growth rate be computed or from where do Smets and Wouters get their prior for this parameter?

2

gamma is the average growth rate per quarter. You should be able to compute it as the mean of dy. SW most probably saw something like 1.6% growth per year and then set their prior to 0.4%