Dynare forums

Hi,

In my dynare code, all equations are in levels. However one equation is an infinite sum which I had to be written in log-linearized form recursively. I entered that equation in the following way for the variable say z , ln(z/zbar)=A*ln(z+1/zbar)+ ln (X/Xbar) where, A is a parameter and zbar and Xbar are steady state values for the variables z and X which I calculated by solving the model. Is this approach correct? Or do I need to log-linearize every equation in the model to make it consistent?

Thank You!

As far as I know, you must either work with all equations log-linearized or with them all in levels (so you must linearize the rest of your model or write this infinite sum in its level).

No, you can combine linearized and nonlinear equations provided that i) you only use a first order approximation and ii) correctly link the levels and percentage deviations. If z is the level of a variable, then
zhat=log(z)-log(steady_state(z)).