BAYESIAN ESTIMATION OF A DSGE MODEL WITH INVESTMENT-SPECIFIC TECHNOLOGY SHOCKS: THE CASE OF BANGLADESH

This paper builds a real business cycle (RBC) model to identify the transitory and permanent components of neutral and investment-specific technology (IST) shocks. This paper applies the Bayesian estimation method to discern IST shocks’ contribution to Bangladesh’s business cycle fluctuations. The variance decomposition results indicate that the model attributes most of the aggregate fluctuations to the permanent components of both technology shocks. Further, the model satisfactorily generates a counter-cyclical trade balance-to-output ratio consistent with data. However, it fails to replicate the excess relative consumption volatility and a downward-slopping autocorrelation function (ACF) of the trade balance-to-output ratio. Introducing a consumption external habit addresses the model’s inadequacies to a certain extent. An alternative preference specification, Jaimovich–Rebelo remarkably improves the model’s performance along the second-moment statistics while maintaining the contributions of technology shocks at the same level.