As part of my effort to understand how uncertainty shocks are implemented in DYNARE, I have written out a code for technology uncertainty shock in the paper by Leduc and Liu (2012), “Uncertainty Shocks are Aggregate Demand Shocks”, basically replicating Figure 13 in the Feb 2014 version of their working paper. I have successfully been able to exactly replicate it (See the attached mod file ‘Uncertainty.mod’).
Having done that I started focusing more on the co-movement puzzle and the Basu and Bundick (2011), “Uncertainty Shocks in a Model of Effective Demand” sticky price story in solving the co-movement puzzle. As a starter, I tried to write a code for a plain-vanilla RBC model with an uncertainty shock where one would expect to see Consumption going down and Hour Worked going up (the precautionary saving motive) which would then cause both Investment and Output to go up.
However, to my utter surprise, what I find is that consumption is going up and hours worked, investment, output are all going down…contrary to our intuition. Please be informed that I have followed exactly the same procedure as I did when replicating the Leduc and Liu paper. This is what has stumped me now and I can’t figure out what’s going wrong.
Could you please kindly have a look at my code for plain vanilla RBC model (called rbc_uncertainty.mod) and kindly inform me what exactly is going wrong in there?