Discussion paper

DP5232 Non-stationary Hours in a DSGE Model

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.


Chang, Y, F Schorfheide and T Doh (2005), ‘DP5232 Non-stationary Hours in a DSGE Model‘, CEPR Discussion Paper No. 5232. CEPR Press, Paris & London. https://cepr.org/publications/dp5232