Smets and Wouters 2007 model: a problem?

[jonathanb]

Dear Johannes,
Dear all,
I carefully read the SW2007 model (paper + mod files provided by AER website, AER's zip + mod file provided by Johannes's GIT), and I have a little question about the code.

At the end of the consumption equation of the mod files (AER's zip+GIT), we can see this:
*(r - pinf(+1) + 0*b) + b;

But in the paper (eq 2 of the SW2007 AER paper), the consumption equation ends with:
*(r - pinf(+1) + b);

So my question is simple: are the mod files from AER's supplemental material or Johannes' GIT are correct?
If yes, can u provide a clear explanation?
If not, can u provide a clear correction?

Same question for:
// Real value of the existing capital stock
pk = -r + pinf(+1) - 0*b + (1/((1 - chabb/cgamma)/(csigma*(1 + chabb/cgamma))))*b + ...
that should be
pk = -r + pinf(+1) - b + ...

Kind regards,
Jonathan

[jonathanb]

ps: tell me if it is a stupid question, but explain clearly why...

[jpfeifer]

There will soon be an updated version of the mod-file on my github page. A preview of the explanation is:

The consumption Euler equation in the paper, equation (2), premultiplies the risk premium process \varepsilon_t^b, denoted by b in this code, by the coefficient c_3. In the code this prefactor is omitted by setting the coefficient to 1. As a consequence, b in this code actually is b:=c_3*\varepsilon_t^b. This rescaling also explains why the standard deviation of the risk premium shock in the AR(1)-process for b has a different standard deviation than reported in the paper. However, the results are unaffected by this

[jonathanb]

Thank you very much for your answer.
However, I am not sure that results are unaffected by this.
Thank you to inform me when you update the file.
Kind regards,
Jonathan

[jpfeifer]

Why do you think results may be affected?
A new and fully documented version for Dynare 4.5 is now available at
https://github.com/JohannesPfeifer/DSGE_mod/tree/master/Smets_Wouters_2007

[jonathanb]

I have run 2 estimations with same configuration and datasets
variance decomposition of risk premium shock are not the same.
I have done that last year, so maybe I have done a mistake about the correction of "*(r - pinf(+1) + 0*b) + b;" which I replaced by "*(r - pinf(+1) + b);" and similarly for the other occurrences of "b".
I think u should try with a good correction and compare.

Another question: from where did u take the answer " The consumption Euler equation in the paper, equation (2), premultiplies the risk premium process \varepsilon_t^b, denoted by b in this code, by the coefficient c_3. In the code this prefactor is omitted by setting the coefficient to 1. As a consequence, b in this code actually is b:=c_3*\varepsilon_t^b. This rescaling also explains why the standard deviation of the risk premium shock in the AR(1)-process for b has a different standard deviation than reported in the paper. However, the results are unaffected by this "

?

Is it your response or does it comes from someone else ?

Kind regards,
Jonathan

[jpfeifer]

No, this is my explanation. But Smets/Wouters already did something similar in their 2003 paper.