Blanchard And Kahn' S Conditions

[knightfar]

Dear all,

I try to replicate the model from "An Estimated Dynamic Stochastic General Equilibrium Model of the Jordanian Economy" by Samya Beidas-Strom and Tigran Poghosyan (2011)

I check the steady state and resid, which all takes value of 0 nicely as they should be.

However, I got an error "Blanchard Kahn conditions are not satisfied: indeterminacy," so I look through the forum and found that I have to check for my eigenvalues

Then I check for eigenvalues and found out "There are 4 eigenvalue(s) larger than 1 in modulus for 5 forward-looking variable(s)."

This led me to another forum suggested to use model diagnostic to get further information. I got the following.

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MODEL_DIAGNOSTICS: The Jacobian of the static model is singular
MODEL_DIAGNOSTICS: there is 2 colinear relationships between the variables and the equations
Relation 1
Colinear variables:
pfstar
pf
e
p
Relation 2
Colinear variables:
pfstar
pf
e
p
Relation 1
Colinear equations
Columns 1 through 20

1 2 3 6 7 8 9 10 11 12 13 14 16 17 18 19 20 21 22 23

Columns 21 through 31

24 25 26 27 28 29 30 32 33 34 35

Relation 2
Colinear equations
21 22

MODEL_DIAGNOSTICS: The singularity seems to be (partly) caused by the presence of a unit root
MODEL_DIAGNOSTICS: as the absolute value of one eigenvalue is in the range of +-1e-6 to 1.
MODEL_DIAGNOSTICS: If the model is actually supposed to feature unit root behavior, such a warning is expected,
MODEL_DIAGNOSTICS: but you should nevertheless check whether there is an additional singularity problem.
MODEL_DIAGNOSTICS: The presence of a singularity problem typically indicates that there is one
MODEL_DIAGNOSTICS: redundant equation entered in the model block, while another non-redundant equation
MODEL_DIAGNOSTICS: is missing. The problem often derives from Walras Law.
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Can any one explain for me how to interpret this and possibly how can I fix my model.

Thank you very much for your time.

Sincerely,
Far

[jpfeifer]

This means that either i) there is most probably still a timing error in (at least) one of your equations or ii) you are trying to determine something in the model that is not uniquely determined. As a first step, I would recheck all equations. In these types of model, the price levels are often not determined at all, only their growth rates. For that reason, it might be necessary to rewrite your model in terms of these inflation rates instead of their levels (although it usually works with the levels as well if you are only simulating)

[knightfar]

Dear Professor jpfeifer,

I fix my model in terms of inflation rates instead of their levels, and it fix the the problem with the correlation nicely. The model diagnostic return no problem in my model. However, dynare still return the problem "Blanchard Kahn conditions are not satisfied: indeterminacy." I check the timing of the model, and it did not conflict with the paper. I play around with the model and pegged the exchange rate, which makes the model worked. However, I would like to look at the flexible exchange rate case. Are there any suggestion?

Thank you very much for your help.

Sincerely,
Far

[jpfeifer]

Not really. I don't know your model. You should try to understand the economic intuition behind the model working with a peg, but not working without a peg. It seems introducing a nominal anchor solved the indeterminacy problem. Thus, it could be a problem with the specification of the monetary policy rule when having flexible exchange rates. Is the parameterization correct?

[knightfar]

Dear Professor jpfeifer,

The parameter was copied from the paper. I will try to work on it with the intuition and solve the problem. One more question, how can I introduce a nominal anchor to my model as you stated?

Thank you for your suggestion again.

[jpfeifer]

That is the problem. You never know whether the original paper is correct.
Fixing an exchange rate (what you did), provides a nominal anchor.