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p - p(-1) = ppi
@xyz There is no reason to suppose you cannot add a particular fiscal sector to the model.
p - p(-1) = ppi
Re: How can deal inflation and price since prices donot has S.S
Postby jpfeifer » Sun Mar 30, 2014 8:27 am
In many models (e.g. interest rate rule) the price level is non-stationary, so you cannot have prices in the model. They will not return to a steady state. I am not sure what you want to do, but you can recover the IRF for prices from the inflation rates by noting the definition of prices. We have that
log(Pi)=log(P)-log(P(-1))
This implies that
log(P)=log(Pi)+log(P(-1)).
If you assume that P(0)=1, you can use the IRF for inflation to manually recover the price level. The procedure is similar to recovering the IRFs of nonstationary output after a permanent technology shock as shown in the Aguiar/Gopinath (2007) mod-file on my homepage.
jpfeifer wrote:As I said, you cannot try to compute something endogenously from the model when it is not uniquely determined. Only inflation is unique, but not the underlying price level.
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