Weird responses to monetary policy shocks
Posted: Sat Oct 22, 2016 4:31 pmDear all,
I am working on a very standard search model which is similar to that published by Faia (2008) in the JEDC except for the fact that I have endogenous participation, informal self-employment (i.e., the shadow economy) and money through a CIA constraint on the purchases of the informal consumption good. Basically, the idea is that the representative household has to decide how many members to employ as informal self-employed, taking into account that doing so the latter do not participate to the matching process in the formal labor market and are not entitled to receive the unemployment benefit.
Now, when I run stochastic simulations with respect to a monetary policy shock, I obtain weird results which I am not able to explain.
1) If I look at the variance decomposition, a shock to the nominal interest rate does explain only the variance of inflation, wages and marginal costs. The contribution of a monetary policy shock to the variance of R is zero, despite plots of IRFs suggest this is not the case. Also, and probably even more strangely, for the same monetary policy shock some variables (inflation, wages, marginal costs and lump-sum taxes) are plotted twice with completely different responses.
2) Altough public spending in this model is completely exogenous (G=GBAR*exp(Z_G)), monetary policy shocks do affect G.
I am not new to DYNARE, but I never experienced such strange results. I suspect there is something wrong in the model, but I cannot figure out what.
Any comment or suggestion would be very appreciated. Attached there is the mod file.
Best,
Claudio
I am working on a very standard search model which is similar to that published by Faia (2008) in the JEDC except for the fact that I have endogenous participation, informal self-employment (i.e., the shadow economy) and money through a CIA constraint on the purchases of the informal consumption good. Basically, the idea is that the representative household has to decide how many members to employ as informal self-employed, taking into account that doing so the latter do not participate to the matching process in the formal labor market and are not entitled to receive the unemployment benefit.
Now, when I run stochastic simulations with respect to a monetary policy shock, I obtain weird results which I am not able to explain.
1) If I look at the variance decomposition, a shock to the nominal interest rate does explain only the variance of inflation, wages and marginal costs. The contribution of a monetary policy shock to the variance of R is zero, despite plots of IRFs suggest this is not the case. Also, and probably even more strangely, for the same monetary policy shock some variables (inflation, wages, marginal costs and lump-sum taxes) are plotted twice with completely different responses.
2) Altough public spending in this model is completely exogenous (G=GBAR*exp(Z_G)), monetary policy shocks do affect G.
I am not new to DYNARE, but I never experienced such strange results. I suspect there is something wrong in the model, but I cannot figure out what.
Any comment or suggestion would be very appreciated. Attached there is the mod file.
Best,
Claudio