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)| false ( Bernanke, B.S., Gertler, M.and Gilchrist, S. 1999), “ The Financial Accelerator in a Quantitative Business Cycle Framework”, in: John B. Taylorand Michael Woodford, eds., Handbook of Macroeconomics, . Volume 1C Amsterdam: Elsevier. 10.1016/S1574-0048(99)10034-X
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In general we allow for the possibility that agents may be more myopic than what would be suggested by a planning horizon based on a biological probability of death.
We use the term liquidity-constrained agents, but this could also include agents that simply choose to consume all of their income. In the literature these agents are commonly referred to as rule-of-thumb consumers or hand-to-mouth consumers. This is important for interpreting the calibration of the model because we will be using higher estimates of the shares of these agents than is consistent with micro data on the share of agents in the economy that do not have any access to credit markets.
The alternative of using habit persistence to generate consumption inertia is not available in our setup. This is because we face two constraints in our choice of household preferences. The first is that preferences must be consistent with balanced growth. The second is the necessity of being able to aggregate across generations of households. We are left with preferences that, while commonly used, do not allow for a powerful role of habit persistence.
For flexible model calibration we allow for the possibility that OLG households attach a different weight ηOLG to consumption than liquidity constrained households. This allows us to model both groups as working during an equal share of their time endowment in steady state, while OLG households have much higher consumption due to their accumulated wealth.
Except for the special case of lump-sum taxation.
The most recent version of GIMF is symmetric in that it also allows for a nonzero foreign exchange risk premium payable by country Ñ.
The turnover in the population is assumed to be large enough that the income receipts of the insurance companies exactly equal their payouts.
Declining income profiles are necessary to eliminate excessive sensitivity of human wealth to changes in the real interest rate, see Faruqee and Laxton (2000). In models with exogenous labor supply and stationary population shares it can also be shown that declining productivity profiles can be calibrated to produce identical macro behavior as more plausible hump-shaped life-cycle productivity profiles.
It is sometimes convenient to keep these two items separate when trying to account for a country’s overall fiscal structure, and when allowing for targeted transfers to LIQ agents.
Without this assumption consumption tax revenue could become too volatile in the short run.
We adopt the convention throughout the paper that all nominal price level variables are written in upper case letters, and that all relative price variables are written in lower case letters.
The distinction of generations could be dropped as all agents must act identically.
There are also some small sales of aggregate manufacturing output back to manufacturing firms, related to manufacturers’ need for resources to pay for adjustment costs.
Note that, for the sake of clarity, we make a notational distinction between two types of elasticities of substitution. Elasticities between continua of goods varieties, which give rise to market and pricing power, are denoted by a σ subscripted by the respective sectorial indicator. Elasticities between factors of production, both in manufacturing and in final goods distribution, are denoted by a ξ subscripted by the respective sectorial indicator.
The factor T is a constant that can be set different from one to obtain different levels of GDP per capita across countries.
In all other instances of nominal rigidities that follow, GIMF offers this as one option. It will however not be mentioned again in this document.
Note that, unlike other adjustment costs, this expression treats lagged inputs as external. This has proved more useful than the alternatives in our applied work.
The tradables market clearing condition is reported for the example of country 1.
Any value of capital is profit maximizing.
This follows Christiano, Motto and Rostagno (2007), “Financial Factors in Business Cycles”. Papers where the model is linearized prior to solving it only require the elasticity σa of the function a(ut). Because for some applications GIMF is solved in nonlinear form we require a full functional form.
Note the absence of expectations operators because this equation has to hold in each state of nature. Likewise for subsequent equations.
In DYNARE this will have to be replaced by the complementary error function unless the Statistical Toolbox is available.
Dividend related shocks are easier to calibrate as they are already in terms of a share of gross returns on net worth.
Home bias in tradables use depends on the parameter αTH and on a similar parameter αDH at the level of final goods imports.
For the ratio
The presence of the growth terms ensures that adjustment costs are zero along the balanced growth path.
For applications of the model where unit root processes are not allowed for, potential GDP (and potential tax bases) can simply be evaluated at their non-stochastic steady state.
Under many calibrations of GIMF such rules exhibit superior properties to automatic stabilizers.
In quarterly versions of GIMF this is replaced by a one-year-ahead four-quarter geometric moving average of inflation.
Inflation persistence in the model is therefore exclusively due to inflation adjustment costs.
The trade spillover parameters spillT, spillI and spillC are calibrated at 0.175.
For simplicity we ignore money given the cashless limit assumption. We also treat some stochastic parameters like βt as constants.
Take the example of bonds held by those of age 0 at time t−1. Only θ of those agents survive into period t, but those that do survive obtain 1/θ units of currency for every unit they held in t − 1. Their weight in period t bonds aggregation is therefore