Calibration of Household Preference Parameters

Calibration of Household Preference Parameters#

Behavioral Assumptions#

Elasticity of labor supply#

As discussed in the OG-Core household theory documentation, we use the elliptical disutility of labor function developed by [Evans and Phillips, 2017]. We then fit the parameters of the elliptical utility function to match the marginal disutility from a constant Frisch elasticity function. OG-PHL users enter the constant Frisch elasticity as a parameter. [Peterman, 2016] finds a range of Frisch elasticities estimated from microeconomic and macroeconomic data. These range from 0 to 4. Peterman makes the case that in lifecycle models without an extensive margin for employment the Frisch elasticity should be higher. For OG-PHL we take a default value of 0.4 from [Altonji, 1986].

Intertemporal elasticity of substitution#

The default value for the intertemporal elasticity of substitution, $\sigma$, is taken from [Attanasio et al., 1999]. We set $\sigma=1.5$.

Rate of time preference#

We take our default value for the rate of time preference parameter, $\beta$ from [Carroll, 2009]. We set the value to $\beta=0.96$ (on an annual basis).

Frisch elasticity of labor supply#

We take our default value for the Frisch elasticity of labor supply as $\nu=0.25$. This value was estimated by [McNelis et al., 2009] (see p. 19).

Remittances#

To calibrate remittances, we use Bangko Sentral Ng Pilipinas February 17, 2025 report entitled, “Personal Remittances Reach a Record High of US$3.7 Billion in December 2024; Full-Year Level of US$38.3 Billion Highest to Date”. Annual growth rate in remittances ($g_{RM}$ or g_RM) is approximately 3.0% (US$3.73B in Dec. 2024 versus US$3.62B in DeC. 2023). Remittances in 2024 represented 8.3% of GDP. We assume that is the level of remittances in the initial period, then remittances grow at a 3.0% rate until period $t_{G1}$ after which they revert to 8.3% of GDP. The theory for how remittances are modeled in OG-PHL can be found in the OG-Core online documentation chapter entitled “Remittances”.