Hi All, instead of the standard way to define an exogenous income process as y=exp(w)*y(-1) where w=rho*w(-1) + e , now I need to generate income as y(+1)=exp(alpha*(TREND+1)+eta(+1)) where eta(+1)=theta*eta+e(+1).
I would like to know how I should include this deterministic trend (TREND). What about if the trend is stochastic?.
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income process with linear trend
by pjg » Tue Apr 01, 2014 3:08 pm
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Re: income process with linear trend
by jpfeifer » Wed Apr 02, 2014 8:22 am
That means your economy has a deterministic growth rate of exp(alpha). Usually it is best to detrend the model by hand. An example is the RBC_news_shock_model.mod on my homepage, where the economy grows at rate gammax. The basic reference would be King/Plosser/Rebelo (1988).
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