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Where is the GE? Consumption Dynamics in DSGEs
Author(s) -
L'HUILLIER JEANPAUL,
YOO DONGHOON
Publication year - 2019
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12570
Subject(s) - dynamic stochastic general equilibrium , consumption (sociology) , economics , total factor productivity , econometrics , benchmark (surveying) , aggregate (composite) , general equilibrium theory , productivity , mathematical economics , macroeconomics , monetary policy , social science , materials science , geodesy , sociology , composite material , geography
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.