Report with full specified baseline model and code for simulation

This report will be based on the results of Tasks 1.1, 1.2 and 1.3: Task 1.1: Specify the baseline model. The baseline model is a one-country, one sector, neo-Keynesian DSGE model with two types of labour (skilled and unskilled), and price rigidities a la Calvo and wage rigidities as in Erceg, Henderson and Levin (2000). The baseline model has three key distinguishing features: (i) The technology in the economy is endogenous and the result of innovation activities; (ii) companies need to invest to adopt new technologies resulting in an endogenous speed of diffusion of new technologies; (iii) public R&D and innovation activities contribute to enhancing the productivity of private R&D as well as in facilitating the diffusion of technologies to private companies. This task will be carried out by CEPR. Task 1.2: Write the Dynare code for the log-linearized dynamic system. This code will describe the steady state ratios and growth rates of the relevant variables as well as the dynamic equations that describe the evolution of the stochastic system. This task will be carried out by UPF. Task 1.3: Calibrate the standard parameters (i.e. those not related to innovation – the parameters related to technology development and adoption will be calibrated in WP6.). We will conduct a literature review to find the range of values used to calibrate the standard parameters of the models. These include the parameters corresponding to the household preferences, the production function, depreciation rates, price and wage rigidities and monetary policy rules. This task will be carried out by CEPR.