Tasks:
The provided Excel spreadsheet generates impulse responses due to a 1% productivity shock for all variables in the model. In the following, you will be asked to compare different scenarios (with modified parameter values) with the baseline scenario (with baseline parameter values). Figures rep- resenting impulse responses corresponding to the baseline and the modified scenarios can be found in the other sheets of this Excel document. You will not have to adjust the plots yourself manually-they will automatically adjust when different parameter values are selected. While answering the following questions, argue using equations (1)–(8) that describe the model equilibrium.

In the baseline case, the value for ρA of 0.95 implies that the shock shows a high degree of persistence but its impact on productivity vanishes after some time.

1. Analyse what happens to the impulse responses when the shock is purely temporary which means that ρA = 0. For that purpose, in the sheet “Parameters” in the column with values for modified parameters change the value for “rhoa” to 0. Compare the effects of a 1% productivity shock in this scenario to the baseline scenario. Explain the differences.

2. Analyse what happens to the impulse responses when the shock is permanent which means that ρA = 1. For that purpose, in the sheet “Parameters” in the column with values for modified parameters change the value for “rhoa” to 1. Compare the effects of a 1% productivity shock in this scenario to the baseline scenario. Explain the differences.