Where is the GE? Consumption Dynamics in DSGEs

We offer a partial equilibrium perspective on the behavior of consumption in dynamic stochastic general equilibrium (DSGE) models. We consider a benchmark dynamic general equilibrium model and show that a standard calibration implies that the real interest rate is essentially fixed. One manifestatio...

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Bibliographic Details
Published inJournal of money, credit and banking Vol. 51; no. 6; pp. 1491 - 1502
Main Authors L'HUILLIER, JEAN‐PAUL, YOO, DONGHOON
Format Journal Article
LanguageEnglish
Published Columbus Ohio State University Press 01.09.2019
Subjects
Aggregate demand
Consumption
E10
E27
E37
Economic models
Equilibrium
monetary policy
nominal rigidities
Productivity
real rigidities
Savings
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Summary:We offer a partial equilibrium perspective on the behavior of consumption in dynamic stochastic general equilibrium (DSGE) models. We consider a benchmark dynamic general equilibrium model and show that a standard calibration implies that the real interest rate is essentially fixed. One manifestation of this feature is that, with separable preferences, the reaction of consumption to total factor productivity (TFP) shocks is flat: the random‐walk permanent income hypothesis holds almost exactly, pretty much as in a partial equilibrium consumption‐savings problem. These results help explain the prominent role of aggregate demand, and how it is achieved, in modern DSGE analysis.
Bibliography:This is a revised version of an earlier draft entitled “The New Keynesian Model and the Small Open Economy RBC Model: Equivalence Results for Consumption.” We thank Dan Cao for his most valuable input on an earlier draft of the paper; we also thank Giulia Felice and seminar and conference participants at University of Rome “Tor Vergata,” University of Lausanne, Sogang University, the 20th Spring Meeting of Young Economists, the 30th Annual Congress of the European Economic Association, the 69th European Meeting of the Econometric Society, and the KEA‐KAEA Joint International Conference for helpful suggestions.
ISSN:0022-2879
1538-4616
DOI:10.1111/jmcb.12570