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Where is the GE? Consumption Dynamics in DSGEs

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  • JEAN‐PAUL L'HUILLIER
  • DONGHOON YOO

Abstract

We offer a partial equilibrium perspective on the behavior of consumption in dynamic stochastic general equilibrium (DSGE) models. We consider a benchmark dynamic general equilibrium model and show that a standard calibration implies that the real interest rate is essentially fixed. One manifestation of this feature is that, with separable preferences, the reaction of consumption to total factor productivity (TFP) shocks is flat: the random‐walk permanent income hypothesis holds almost exactly, pretty much as in a partial equilibrium consumption‐savings problem. These results help explain the prominent role of aggregate demand, and how it is achieved, in modern DSGE analysis.

Suggested Citation

  • Jean‐Paul L'Huillier & Donghoon Yoo, 2019. "Where is the GE? Consumption Dynamics in DSGEs," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(6), pages 1491-1502, September.
  • Handle: RePEc:wly:jmoncb:v:51:y:2019:i:6:p:1491-1502
    DOI: 10.1111/jmcb.12570
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    References listed on IDEAS

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    Cited by:

    1. Corrado, Luisa & Silgado-Gómez, Edgar & Yoo, Donghoon & Waldmann, Robert, 2022. "Ambiguous economic news and heterogeneity: What explains asymmetric consumption responses?," Journal of Macroeconomics, Elsevier, vol. 72(C).
    2. Joshua Brault & Hashmat Khan, 2022. "The Real Interest Rate Channel Is Structural in Contemporary New‐Keynesian Models: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(5), pages 1551-1563, August.
    3. Jean-Paul L’Huillier & Robert Waldmann & Donghoon Yoo, 2021. "What Is Consumer Confidence?," ISER Discussion Paper 1135r, Institute of Social and Economic Research, Osaka University, revised Dec 2022.

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