Habit Formation, Price Indexation and Wage Indexation in the
DSGE Model: Specification, Estimation and Model Fit

J 2011

Habit Formation, Price Indexation and Wage Indexation in the DSGE Model: Specification, Estimation and Model Fit

SLANICAY, Martin and Osvald VAŠÍČEK

Basic information

Original name

Habit Formation, Price Indexation and Wage Indexation in the DSGE Model: Specification, Estimation and Model Fit

Authors

SLANICAY, Martin (203 Czech Republic, guarantor, belonging to the institution) and Osvald VAŠÍČEK (203 Czech Republic)

Edition

Národohospodářský obzor – Review of Economic Perspectives, Brno, Masaryk University, 2011, 1213-2446

Other information

Language

English

Type of outcome

Article in a journal

Field of Study

50200 5.2 Economics and Business

Country of publisher

Czech Republic

Confidentiality degree

is not subject to a state or trade secret

References:

URL

RIV identification code

RIV/00216224:14560/11:00052649

Organization unit

Faculty of Economics and Administration

Keywords in English

New Keynesian DSGE model; habit formation; price indexation; wage indexation; model comparison; Bayes factor

Abstract

In the original language

In order to determine which specification provides better fit of the data, this paper presents several specifications of a closed economy DSGE model with nominal rigidities. The goal of this paper is to find out whether some characteristics widely used in New Keynesian DSGE models, such as habit formation in consumption, price indexation and wage indexation, provide better fit of the macroeconomic data. Model specifications are estimated on the data of the US economy and Euro Area 12 economy, using Bayesian techniques, particularly the Metropolis Hastings algorithm. The data fit measure is a Bayes factor calculated from marginal likelihoods. Results suggest that including habit formation in consumption significantly improves the empirical data fit of the model, whereas including partial price indexation and partial wage indexation does not improve the empirical data fit of the model. Variants with full price indexation and full wage indexation were the worst ones concerning their data fit.

Links

1M0524, research and development project

Name: Centrum výzkumu konkurenční schopnosti české ekonomiky

Investor: Ministry of Education, Youth and Sports of the CR, Research Centre for the Competitiveness of the Czech Economy

Cite

SLANICAY, Martin and Osvald VAŠÍČEK. Habit Formation, Price Indexation and Wage Indexation in the DSGE Model: Specification, Estimation and Model Fit. Národohospodářský obzor – Review of Economic Perspectives. Brno: Masaryk University, 2011, vol. 11, No 2, p. 71-92, 23 pp. ISSN 1213-2446.

@article{945120,
   author = {Slanicay, Martin and Vašíček, Osvald},
   article_location = {Brno},
   article_number = {2},
   keywords = {New Keynesian DSGE model; habit formation; price indexation; wage indexation; model comparison; Bayes factor},
   language = {eng},
   issn = {1213-2446},
   journal = {Národohospodářský obzor – Review of Economic Perspectives},
   title = {Habit Formation, Price Indexation and Wage Indexation in the DSGE Model: Specification, Estimation and Model Fit},
   url = {http://nho.econ.muni.cz/2011/2011-2/habit-formation-price-indexation-and-wage-indexation-dsge-model-specification-estimation},
   volume = {11},
   year = {2011}
}

TY  - JOUR
ID  - 945120
AU  - Slanicay, Martin - Vašíček, Osvald
PY  - 2011
TI  - Habit Formation, Price Indexation and Wage Indexation in the DSGE Model: Specification, Estimation and Model Fit
JF  - Národohospodářský obzor – Review of Economic Perspectives
VL  - 11
IS  - 2
SP  - 71-92
EP  - 71-92
PB  - Masaryk University
SN  - 12132446
KW  - New Keynesian DSGE model
KW  - habit formation
KW  - price indexation
KW  - wage indexation
KW  - model comparison
KW  - Bayes factor
UR  - http://nho.econ.muni.cz/2011/2011-2/habit-formation-price-indexation-and-wage-indexation-dsge-model-specification-estimation
N2  - In order to determine which specification provides better fit of the data, this paper presents several specifications of a closed economy DSGE model with nominal rigidities. The goal of this paper is to find out whether some characteristics widely used in New Keynesian DSGE models, such as habit formation in consumption, price indexation and wage indexation, provide better fit of the macroeconomic data. Model specifications are estimated on the data of the US economy and Euro Area 12 economy, using Bayesian techniques, particularly the Metropolis Hastings algorithm. The data fit measure is a Bayes factor calculated from marginal likelihoods. Results suggest that including habit formation in consumption significantly improves the empirical data fit of the model, whereas including partial price indexation and partial wage indexation does not improve the empirical data fit of the model. Variants with full price indexation and full wage indexation were the worst ones concerning their data fit.
ER  -

SLANICAY, Martin and Osvald VAŠÍČEK. Habit Formation, Price Indexation and Wage Indexation in the DSGE Model: Specification, Estimation and Model Fit. \textit{Národohospodářský obzor – Review of Economic Perspectives}. Brno: Masaryk University, 2011, vol.~11, No~2, p.~71-92, 23 pp. ISSN~1213-2446.

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