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Analysis of Persistence in DSGE Models

Student: Vyacheslav Kabaev

Supervisor: Andrey G. Shulgin

Faculty: Faculty of Economics

Educational Programme: Bachelor

Year of Graduation: 2014

<p>In this work, a dynamic new Keynesian model was built as a foundation. It includes 4 economic agents, namely: consumers; intermediate producers; final producer and central bank. The model contains following features: decreasing returns to scale in intermediate production; the central bank in the model works according to Taylor&rsquo;s rule; consumers gets benefit from consumption, money and work and also have habits; all variables of the models are in real terms. 4 shocks, namely: shock of consumers&rsquo; preferences; shock of a restrictive monetary policy; technological shock and shock of change in government spending, are implemented in the model. For an estimation of the model 3 series of United States&rsquo;s data were used: consumption; government spending and interest rate.</p><p>In the work, the detailed description of final equations and the steady state are presented. The discussion of an estimation process is carried out and prior and posterior distributions were presented. Impulse response functions of model variables are analyzed. Besides, in this work the problem of weak joint identification of the shock of consumers&rsquo; preferences and its persistence parameter is discussed. Moreover the same problem of the elasticity parameter of consumption and the habit formation parameter is analyzed.</p><p>According to results of the work, we can conclude that the stability of the model strongly depends on the returns to scale parameter. Further, the important result is that using the model constructed in the work, the problem of weak joint identification of the shock of consumers&rsquo; preferences and its persistence parameter doesn&rsquo;t exist. As for the elasticity parameter of consumption and the habit formation parameter, the joint estimation is also possible.</p>

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