The paper presents one application of sensitivity analysis methods for empirical general equilibrium models. Sensitivity analysis allows parameter space to be investigated to ensure model stability. The main method used is called Monte Carlo filtering, in which a random sample is generated from a prior distribution. According to the acceptability of the obtained solutions of the model, the results are classified into two sets, corresponding to the behaviour or non-behaviour of the model. A formal Kolmogorov-Smirnov test is then performed. The methods are illustrated with a standard general equilibrium model taken from the literature.
The paper is the third of three parts that together present methods for building a dynamic general equilibrium model. It presents detailed assumptions and the derivation of the new-Keynesian Phillips curve for wages. Households in the model have monopolistic power that allows them to set the wage rate for their unique qualifications, which are the source of heterogeneity. Each consumer sets the wage optimally by maximising the expected, discounted over time, sum of utilities, taking into account the probability of having no opportunity for future optimisation. The key structural equation that captures wage inertia correlates wage inflation with its expected value in future and the degree of the disequilibrium of the labour market, interpreted as the difference between real wages and the marginal rate of substitution of consumption and leisure.
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