I am actually replicating the results of the paper by Challe and Giannitsarou (2012). Briefly, the model is similar to a standard Christiano et.al (2005) or Smets and Wouter (2007), except that stock prices are included. Capital is owned by firms and therefore they have another layer of optimization in addition to the standard optimization (optimal pricing scheme and minimizing cost). However, with a representative framework the set of equations are exactly the same where capital is owned by households and we add the stock market equations in an ad-hoc manner (Please let me know if I am wrong on this).
I have the following questions:
I have attached my code. But the main issue I have is regarding the response of TFP shocks. Specifically, output decreases with a certain level of price stickiness. I am not sure on why this is happening. This should not be the case with a low Calvo probability. I am not sure if it has something to do with labor dynamics. Would be great to get some feedback or comment on where the code or I am wrong.
Also, with no price stickiness, the model is not able solve for the steady state. Even though, I have analytically solved the steady state and is shown in the “parameters” block. I am not sure why this is the case either.
Thank you. Would highly appreciate if anyone could provide any help. Code attached.SP_CA.mod (4.2 KB)