MT - 07. RBC Dynamics

Question 1

Christiano, Eichembaum and Evans (2005)

Answer 1

Aim: add small amounts of nominal rigidities as per the Calvo pricing framework to account for inertia in inflation and persistence in output

• After a positive MP shock, output can be increased by increasing labour and capital, but also by utilising capital more intensely - less of an impact on MC!
• Stickiness of nominal wages is crucial for model, price stickiness has a relatively small role.

Conclusion: model does well in accounting for dynamic response of US economy to a MP shock. Generates the hump shaped response in output, investment, consumption, profits, employment and productivity. Model also gets a small real wage response.

Question 2

Abel (1981)

Answer 2

Aim: model a firm with quasi-fixed factors subject to adjustment costs.

Conclusion: capital investment negatively related to capital utilisation along the path to steady state, but capital utilisation and investment positively related in response to unanticipated demand shocks

Question 3

Abel (1990)

Answer 3

Aim: Introduce an all-encompassing utility function with three key elements:

i. Time separability
ii. “Catching up with the Joneses” – dependence on consumption relative to lagged cross-sectional average consumption
iii. Habit formation

Conclusion: Introducing this into asset pricing can then be used to analyse the equity risk premium.

Question 4

Justiniano and Primiceri (2007)

Answer 4

– investment specific technology shocks account for most of decline in volatility

Question 5

Ravn, Schmitt-Grphe and Uribe (2006)

Answer 5

– deep habits (individual good reference points not just aggregate)  countercyclical markups match evidence

Question 6

Smets and Wouters (2007)

Answer 6

model NKM models able to fit US macro data very well, structural model can compete with VAR

Question 7

Fisher (2006)

Answer 7

– tech shocks –> large SR fluctuations, most of shocks are driven by investment specific technology shocks,