DP5232 Non-stationary Hours in a DSGE Model

Author(s): Yongsung Chang , Taeyoung Doh , Frank Schorfheide

Publication Date: September 2005

Keyword(s): Bayesian econometrics , DSGE models , non-stationary hours

JEL(s): C32 , E52 , F41

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP5232.asp

The time series fit of dynamic stochastic general equilibrium (DSGE) models often suffers from restrictions on the long-run dynamics that are at odds with the data. Relaxing these restrictions can close the gap between DSGE models and vector autoregressions. This paper modifies a simple stochastic growth model by incorporating permanent labor supply shocks that can generate a unit root in hours worked. Using Bayesian methods we estimate two versions of the DSGE model: the standard specification in which hours worked are stationary and the modified version with permanent labor supply shocks. We find that the data support the latter specification.