Dear @jpfeifer, thank you for your comment. I checked the model again and this time I tried to include only two additional shocks (preference shock and interest rate shock). I included preference shock to utility function (as in some papers) and derived “new FOCs” (my FOCs did not change much except for the preference variable {u_t}). But still only few variables respond to preference shock, I do not have such problems with technology or interest rate shock. Could you please give more suggestions? CSEdynare2.mod (4.3 KB)
I think it has to do with your specification. You can verify that the shock only distorts the intertemporal margin, but no the labor margin. So it seems to be a feature of your model.
Dear @jpfeifer, thank you for your suggestion. I understood your comment, but I could not find any information on how can I verify that shocks only distort intertemporal margin. Also, to make shock distorts the labor margin, should I change the model itself?
If you look at the labor FOC, the shock appears on both sides and can be canceled. It’s a matter of what you want to achieve. Sometimes the preference shock only affects consumption. In that case, it will distort both margins directly.