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What do “residuals” from first-order conditions reveal about DGE models?

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  • Alok Johri
  • Marc-André Letendre

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.

Suggested Citation

  • Alok Johri & Marc-André Letendre, 2006. "What do “residuals” from first-order conditions reveal about DGE models?," Department of Economics Working Papers 2006-01, McMaster University.
    • Handle: RePEc:mcm:deptwp:2006-01
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    Cited by:

    1. Lavan Mahadeva & Juan Carlos Parra Alvarez, 2008. "Testing a DSGE model and its partner database," Borradores de Economia 479, Banco de la Republica de Colombia.
    2. Keqiang Hou & Alok Johri, 2018. "Intangible Capital, the Labor Wedge and the Volatility of Corporate Profits," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 216-234, July.
    3. Wagner Joel, 2019. "What does a relative price of investment wedge reveal about the role of investment-specific technology?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 19(2), pages 1-20, June.
    4. Keqiang Hou & Alok Johri, 2009. "Intangible Capital, Corporate Earnings and the Business Cycle," Department of Economics Working Papers 2009-17, McMaster University.
    5. Hafedh Bouakez & Takashi Kano, 2006. "Learning-by-Doing or Habit Formation?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(3), pages 508-524, July.
    6. Alok Johri, 2009. "Delivering Endogenous Inertia in Prices and Output," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 736-754, October.
    7. Marc‐André Letendre & Daqing Luo, 2007. "Investment‐specific shocks and external balances in a small open economy model," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 40(2), pages 650-678, May.
    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. Christopher Gunn & Alok Johri, 2011. "News and knowledge capital," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 92-101, January.
    10. Clarke, Andrew J. & Johri, Alok, 2009. "Procyclical Solow Residuals Without Technology Shocks," Macroeconomic Dynamics, Cambridge University Press, vol. 13(3), pages 366-389, June.
    11. Kegiang Hou & Alok Johri, 2013. "Intangible Capital and the Excess Volatility of Aggregate Profits," Department of Economics Working Papers 2013-04, McMaster University.
    12. 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.
    13. Alok Johri & Muhebullah Karimzada, 2021. "Learning efficiency shocks, knowledge capital and the business cycle: A Bayesian evaluation," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(3), pages 1314-1360, November.
    14. Alok Johri, 2005. "Learning-by-doing and Endogenous Price-level Inertia," Department of Economics Working Papers 2005-02, McMaster University.
    15. Marc‐André Letendre, 2004. "Capital utilization and habit formation in a small open economy model," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 37(3), pages 721-741, August.

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    More about this item

    Keywords

    dynamic general equilibrium models; real business cycles; first-order conditions.;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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