Revisiting the Great Moderation using the Method of Indirect Inference

Table 2: Calibration of Parameters
Parameters Denitions Calibrated Values
time discount factor 0.99
inverse of intertemporal consumption elasticity 2
inverse of labour elasticity 3
! Calvo contract price non-adjusting probability 0.53
G
steady-state gov. expenditure to output ratio 0.23
Y
steady-state output to consumption ratio 16 1 (implied value)
C 0:77
(1 !)(1 !)
!
= 0.42 (implied value)
= ( + Y ) 2.36 (implied value)
C
price elasticity of demand 6
1 optimal trade-o rate on the Timeless Rule 17 1 (implied value)
6
Parameters on post-break interest-rate-smoothed Taylor Rule 18
interest rate smoothness 0.76
ination response 1.44
0 x output gap response 0.14
v demand shock persistence pre-break 0.88 (sample estimate)
post-break 0.93 (sample estimate)
u w supply shock persistence pre-break 0.91 (sample estimate)
post-break 0.80 (sample estimate)
policy shock persistence
-model one (Opt. Timeless)
pre-break
post-break
0.59
0.38
(sample estimate)
(sample estimate)
-model two (Stdd. Taylor) post-break 18 0.39 (sample estimate)
-model three (IRS Taylor) post-break 18 0.39 (sample estimate)
of demand of 6 are both taken from Kuester, Muller and Stolting (2009); these values
imply an average contract length of more than three quarters 19 , while the constant price
mark-up over marginal cost is 1.2. The implied steady-state output-consumption ratio
of 1/0.77 is calculated based on the steady-state government-expenditure-to-output ratio
of 0.23 calibrated by Foley and Taylor (2004). The second half of table 2 reports the autoregressive
coecients of the model errors extracted from the data given the calibrated
parameters; it shows that in both the Great Acceleration and the Great Moderation the
19 2(1 !) 1 1 3:26, to be more precise.
21