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What do `residuals' from first-order conditions reveal about DGE models?

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  • Johri, Alok
  • Letendre, Marc-Andre

Abstract

The first-order condition (FOC) associated with labour in many dynamic general equilibrium models involves only current period variables. Residuals constructed from this FOC are inconsistent with aggregate US data in that they are very large and highly persistent. The persistence suggests that models which introduce dynamic terms in the labour FOC may be more consistent with the data. Three such models (one with learning by doing, one with habit formation, and one with labour adjustment costs) confirm that they can reduce the persistence in the residuals making the models more consistent with the joint dynamics of consumption, output and hours.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 31 (2007)
Issue (Month): 8 (August)
Pages: 2744-2773

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Handle: RePEc:eee:dyncon:v:31:y:2007:i:8:p:2744-2773

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Citations

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Cited by:
  1. Lavan Mahadeva & Juan Carlos Parra Alvarez, . "Testing a DSGE model and its partner database," Borradores de Economia 479, Banco de la Republica de Colombia.
  2. Adnrew J. Clarke & Alok Johri, 2008. "Pro-cyclical Solow Residuals without Technology Shocks," Department of Economics Working Papers 2008-02, McMaster University.
  3. Takashi Kano & Hafedh Bouakez, 2005. "Learning-by-doing or Habit Formation?," Computing in Economics and Finance 2005 126, Society for Computational Economics.
  4. Kegiang Hou & Alok Johri, 2013. "Intangible Capital and the Excess Volatility of Aggregate Profits," Department of Economics Working Papers 2013-04, McMaster University.
  5. Christopher M. Gunn & Alok Johri, 2009. "News and knowledge capital," Department of Economics Working Papers 2009-02, McMaster University.
  6. Clarke, Andrew J., 2006. "Learning-by-doing and aggregate fluctuations: Does the form of the accumulation technology matter?," Economics Letters, Elsevier, vol. 92(3), pages 434-439, September.
  7. Alok Johri, 2007. "Delivering Endogenous Inertia in Prices and Output," Department of Economics Working Papers 2007-04, McMaster University.
  8. Johri, Alok & Letendre, Marc-André & Luo, Daqing, 2011. "Organizational capital and the international co-movement of investment," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 511-523.
  9. Alok Johri, 2005. "Learning-by-doing and Endogenous Price-level Inertia," Department of Economics Working Papers 2005-02, McMaster University.
  10. Keqiang Hou & Alok Johri, 2009. "Intangible Capital, Corporate Earnings and the Business Cycle," Department of Economics Working Papers 2009-17, McMaster University.

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