Macroeconomic resilience in a DSGE model

Adam Elbourne (), Debby Lanser (), Bert Smid () and Martin Vromans ()

CPB Discussion Papers from CPB Netherlands Bureau for Economic Policy Analysis

Abstract: We use the dynamic stochastic general equilibrium (DSGE) model of Altig et al. (2005) to analyse the resilience of an economy in the face of external shocks. The term resilience refers to the ability of an economy to propser in the face of shocks. The Altig et al. model was chosen because it combined both demand and supply shocks and because various market rigidities/imperfections, which have the potential to affect resilience, are modelled. We consider the level of expected discounted utility to be the relevant measure of resilience. The effect of market rigidities, eg. wage and price stickiness, on the expected level of utility is minimal. The effect on utility is especially small when compared to the effect of market competition, because the latter has a direct effect on the level of output. This conclusion holds for the family of constant relative risk aversion over consumption utility functions. A similar conclusion was drawn by Lucas (1987) regarding the costs of business cycles. We refer to the literature that followed Lucas for ideas for how a DSGE model might be adjusted to give a more meaningful analysis of resilience. We conclude that the Altig et al. DSGE model does not produce a relationship between rigidities and the level of output and, hence, does not capture the effect of inflexibility on utility that one observes colloquially.

Keywords: Resilience; Nominal Rigidities; Capital Adjustment Costs; DSGE Models (search for similar items in EconPapers)
JEL-codes: E17 E27 E37 C32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-upt
Date: 2008-01
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Persistent link: http://EconPapers.repec.org/RePEc:cpb:discus:96

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