The interpretation of Gerali et al(2010)

[JohnChan]

Hi. I'm working on the model by Gerali et al. (2010) and try to figure out how they estimate/calibrate the parameters in the first part. I cannot understand how the capital utilization cost parameter in the line 246 is derived: "eksi_2 = 0.1*r_k_ss; " I can see that "eski_1= r_k_ss" from the F.O.C of capital utilization rate at the steady state where "exp(u) =1", but why the relative elasticity of capital rental rate("exp(r_k)") with resptct to capital utilization("exp(u)") at the steady state is 0.1? It seems this parameter is given in advance but I cannot figure it out from the model by myself.

Your kindly help is much appreciated.

[jpfeifer]

It follows directly from the calibration in Table 1. The parameter you mean is equal to the ratio of xi_2/xi_1, which is 0.1.

[JohnChan]

Thanks for replying, and I found the formal explanation in their previous working paper as well, saying that they set this ratio 0.1 as to limit the non-linearity of the model.