Blanchard Kahn conditions, Rabanal, Rubio-Ramirez (2005)

[seb_h]

Hi everyone,

I am new to dynare so there are probably several interrelated sources of confusion here.

I am trying to replicate Rabanal and Rubio-Ramirez, "Comparing New Keynesian models of the business cycle: A Bayesian approach", JME (2005).

They have their model already linearized around the steady state, so this is what I used for the model equations.

I began by simulating the model using the means of their estimated posterior distributions for parameter values. This goes through.

I then try to estimate their model using, as they do, data on output, prices, wages and interest rate. Here is where I am stuck.

For the eigenvalues I get

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EIGENVALUES:
         Modulus             Real        Imaginary

          0.4391           0.4391                0
             0.8              0.8                0
            0.85             0.85                0
               1                1                0
           1.011            1.011                0
           1.047            1.047                0
             Inf              Inf                0
There are 3 eigenvalue(s) larger than 1 in modulus
for 3 forward-looking variable(s)
 
The rank condition is verified.


So it seems I have a unit root. Might this be the reason for the following problem?

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Error in computing likelihood for initial parameter values
Error using print_info (line 40)
Blanchard Kahn conditions are not satisfied: no stable equilibrium


Help appreciated,

Sebastian

[jpfeifer]

Your model is not stationary, because the price level is not stationary. If you are supposed to use the price level as opposed to inflation, use the diffuse_filter-option