UIP in two country model

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UIP in two country model

Postby mghazias » Thu Jul 11, 2013 11:58 pm

Hi Everyone;

I have a colinearity problem in a simple two country model. I have removed all the rigidities and extra features of the model and yet the problem is there.
Problematic equations are interest rate equations in two country and UIP equation connecting the two variable.
Please help, I have spent endless time on this and really frustrated.
Do appreciate your advices.
Thanks

P.S. it produces a LATEX file that you can see all equations.
Attachments
basic.mod
(4.07 KiB) Downloaded 118 times
sfile2.m
(2.02 KiB) Downloaded 88 times
basic_steadystate.m
(3.54 KiB) Downloaded 79 times
mghazias
 
Posts: 19
Joined: Mon Oct 22, 2012 12:49 am

Re: UIP in two country model

Postby jpfeifer » Fri Jul 12, 2013 6:37 am

Try narrowing down the problem even further. Get rid of the adjustment costs and the exogenous processes except for 1.

One a more constructive level: Are you sure that you can determine the single prices in the respective countries? I only know those model written down in terms of inflation instead of the price levels. Moreover, could you post a LaTeX-file detailing how you derived equation 41 and 42 from the household's optimization problem and the setup?
------------
Johannes Pfeifer
University of Cologne
https://sites.google.com/site/pfeiferecon/
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Re: UIP in two country model

Postby mghazias » Fri Jul 12, 2013 8:33 pm

I will narrow it down further,

I am following this work:

[url]
http://www.federalreserve.gov/pubs/ifdp ... pendix.pdf
[/url]

and

[url]
http://www.sciencedirect.com/science/ar ... 611000365#
[/url]

I derived UIP from household optimization, it didn't work, then followed above papers and some others.
Actually there are different ways to make bond position stationary. portfolio cost, endogenous discount factor, debt elastic interest rate etc. I used the debt elastic model for no reason as it is shown they all do the same work.

I will post a pdf file soon.

Thanks a lot JP.
mghazias
 
Posts: 19
Joined: Mon Oct 22, 2012 12:49 am

Re: UIP in two country model

Postby jpfeifer » Fri Jul 12, 2013 9:42 pm

The stationarity of assets is not the problem. If you look at equations 79 and 80 in the Appendix, you can see my point. What is treated as a variable is the relative prices, not the individual prices.
------------
Johannes Pfeifer
University of Cologne
https://sites.google.com/site/pfeiferecon/
jpfeifer
 
Posts: 6940
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Location: Cologne, Germany

Re: UIP in two country model

Postby mghazias » Sun Jul 14, 2013 12:14 am

About equations 79 and 80, I think I have done the same,

But about individual prices and inflation, I am coming to this conclusion that I must use inflation in budget constraint, but, I will need two more equations. Should I use taylor rule equation (or some monetary policy equation) for that?
mghazias
 
Posts: 19
Joined: Mon Oct 22, 2012 12:49 am

Re: UIP in two country model

Postby jpfeifer » Mon Jul 15, 2013 4:52 pm

That should depend on your model. Start with the easiest version possible to see which equations are missing.
------------
Johannes Pfeifer
University of Cologne
https://sites.google.com/site/pfeiferecon/
jpfeifer
 
Posts: 6940
Joined: Sun Feb 21, 2010 4:02 pm
Location: Cologne, Germany


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