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Non-stationary hours in a DSGE model

  • Yongsung Chang
  • Taeyoung Doh
  • Frank Schorfheide

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 Federal Reserve Bank of Philadelphia in its series Working Papers with number 06-3.

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Date of creation: 2006
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Handle: RePEc:fip:fedpwp:06-3
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