The trick to treat the unit root vaiables

[tomnilson40]

Hi guys,

I am simulating a model which includes some unit root variables which obviously don't get back to the steady state. What is the trick to enter this sort of equations (such as i= k- k(-1) ) in to Dynare to avoid this problem.

In this source (https://files.nyu.edu/ts43/public/research/AP_tom16.pdf) it talks about "ONE solution" for this problem but I do not know exactly what it means!

Any idea?!!

Cheers

[jpfeifer]

People typically detrend the model by dividing everything by the stochastic trend.

[tomnilson40]

Thanks for your reply. That would be great if you could please send me an example article/model for this case.

Cheers

[jpfeifer]

In the unstable snapshot in the examples folder you will find a New Keynesian model that has been treated this way, including the detailed articles showing how to do it.

[tomnilson40]

Dear jpfeifer,

Thanks for your reply. I think you mean this article , "The econometrics of DSGE models", I am reading it at the moment to see how it works.

Cheers