Exchange rate and recursive preferences
Posted: Wed Nov 05, 2014 12:42 pmDear forum members,
I am trying to build a very simple toy model with 2 countries, recursive preferences and complete markets. The economy of each country is similar to what is common with recursive preferences (e.g., Caldara et al., 2012), and I just allow households to trade a complete set of state-contingent claims.
As mentioned in Gourio et al. (2013), for example, the complete markets assumption implies that the exchange rate follows
q(+1)/q = ms/m
where "ms" and "m" are the stochastic discount factors for the foreign (MSt,t+1) and domestic (Mt,t+1) country, respectively.
My code runs if both countries are in autarky (i.e., if I arbitrarily set q=1 for all t), but when I add the exchange rate equation I get two errors:
1) I have 13 forward-looking variables but only 12 eigenvalues > 1 in modulus;
2) the model_diagnostics option tells me there is 1 colinear relationship between the variables and the equations
I'm new to Dynare so I am having trouble figuring out what is wrong with the code. Any help or feedback you could provide would be really appreciated.
Regards,
Andre
I am trying to build a very simple toy model with 2 countries, recursive preferences and complete markets. The economy of each country is similar to what is common with recursive preferences (e.g., Caldara et al., 2012), and I just allow households to trade a complete set of state-contingent claims.
As mentioned in Gourio et al. (2013), for example, the complete markets assumption implies that the exchange rate follows
q(+1)/q = ms/m
where "ms" and "m" are the stochastic discount factors for the foreign (MSt,t+1) and domestic (Mt,t+1) country, respectively.
My code runs if both countries are in autarky (i.e., if I arbitrarily set q=1 for all t), but when I add the exchange rate equation I get two errors:
1) I have 13 forward-looking variables but only 12 eigenvalues > 1 in modulus;
2) the model_diagnostics option tells me there is 1 colinear relationship between the variables and the equations
I'm new to Dynare so I am having trouble figuring out what is wrong with the code. Any help or feedback you could provide would be really appreciated.
Regards,
Andre