Abstract
Summary A New Keynesian DSGE model with non-Ricardian households is estimated for the Portuguese economy and the stability of the model’s prediction (posterior distributions, impulse responses, and sources of fluctuations in endogenous variables) tested under different assumptions on non-Ricardian households. Their share is estimated to be relatively high (58 %). Furthermore, estimates of several parameters as well as the magnitude and persistence of shocks are particularly sensitive to the share of non-Ricardian households. Impulse responses to consumption preference and productivity shocks are amplified for lower shares; for greater proportions, the model predicts more noticeable responses to price markup and government spending shocks. Fluctuations in output growth are mainly driven by productivity shocks for a lower share and by price markup shocks in the opposite scenario. A high proportion of these households together with a high degree of price stickiness lead the Taylor-type interest rate rule solution to be locally indeterminate.
Highlights
Since the appeal of Mankiw (2000) for the inclusion of rule-of-thumb consumers in macroeconomic models, several papers have attempted to do so
The economy is populated by a continuum of infinitely-lived households, which may be of two types: a proportion (1 M) is a Ricardian household, which maximizes its expected lifetime utility over consumption and leisure and which has complete access to capital markets in order to smooth consumption over time; on the other hand, a fraction M is a non-Ricardian household constrained to consume its disposable income each period
Galí, LópezSalido, and Vallés (2007) argue that indeterminacy may be the result of a combination of a large weight of non-Ricardian households and a high degree of price stickiness
Summary
Since the appeal of Mankiw (2000) for the inclusion of rule-of-thumb consumers in macroeconomic models, several papers have attempted to do so. López-Salido, and Vallés (2007) extended the standard sticky-price model with deficit financing by incorporating optimizing and rule-of-thumb consumers They show that their calibrated model can account for the government spending shock impact on private consumption. This paper clarifies the importance of choosing appropriately the share of rule-of-thumb consumers by showing that different specifications may significantly alter overall results and conclusions It should be regarded as an attempt to define the share of non-Ricardian households in the Portuguese economy. The remainder of the paper is organized as follows: Section 2 describes the model economy; Section 3 presents the calibrated parameters and priors defined for the Portuguese economy; and for alternative specifications of non-Ricardian households Section 4 analyzes posterior estimates, the responses of output growth, inflation, and short-term nominal interest rate to structural shocks, as well as their sources of fluctuations. A change in inflation) for a given proportion of rule-of-thumb consumers is not sufficient to ensure the unique equilibrium of the interest rate rule. 4 Forni, Monteforte, and Sessa (2009) add non-Ricardian households to Christiano, Eichenbaum, and Evans (2005) and conclude that fiscal policy has a mild effect on private consumption. 5 Almeida, Castro, and Félix (2010) present a dynamic general equilibrium model with calibrated non-Ricardian consumers (at 40 %) to assess the effects of increasing competition in the labor market and in the non-tradable goods sector
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