Dynare forums

A model with sticky prices usually closes with a taylor rule and in some cases also with a Fisher equation. In taylor rule we usually have variables with BARS like log(Rt/Rt_bar) where Rt is the nominal interest rate. Are we suppose to write both Rt and Rt_bar in our endogenous variable block? What value will Rt_bar take in the initial value box if we know the value or say Rt.

Any help on this will he appreciated.

Rt will be an endogenous variable while Rt_bar is a parameter or, depending on what you are doing a model-local variable. Say you set gross inflation in steady state to 1.01 and the discount factor to beta=0.99. Then the Fisher equation tells you that in steady state

Code: Select all

var Rt;
parameters beta Pi_bar;

beta=0.99;
Pi_bar=1.01;

model;
#Rt_bar=1/beta*Pi_bar
log(Rt/Rt_bar)=...
end;

See also the description in Pfeifer(2013): "A Guide to Specifying Observation Equations for the Estimation of DSGE Models" https://sites.google.com/site/pfeiferecon/Pfeifer_2013_Observation_Equations.pdf.