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Non-stationary Hours in a DSGE Model

  • Chang, Yongsung
  • Doh, Taeyoung
  • Schorfheide, Frank

The time series fit of dynamic stochastic general equilibrium (DSGE) models often suffers from restrictions on the long-run dynamics that are at odds with the data. Relaxing these restrictions can close the gap between DSGE models and vector autoregressions. This paper modifies a simple stochastic growth model by incorporating permanent labor supply shocks that can generate a unit root in hours worked. Using Bayesian methods we estimate two versions of the DSGE model: the standard specification in which hours worked are stationary and the modified version with permanent labor supply shocks. We find that the data support the latter specification.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5232.

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Date of creation: Sep 2005
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Handle: RePEc:cpr:ceprdp:5232
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  1. Del Negro, Marco & Schorfheide, Frank & Smets, Frank & Wouters, Raf, 2005. "On the fit and forecasting performance of New-Keynesian models," Working Paper Series 0491, European Central Bank.
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