Basic question: Linearized model with big ratios.

[Lexes9]

Hi, sorry for the basic question.

I am new to Dynare. The linearized version of the model I want to simulate has some equations with variables with big ratios (of non linearized variables), for example:

y= /frac{C}{Y} c_t+ /frac{I}{Y} i_t+ /frac{G}{Y} g_t

I just would like to know if the correct way to code this in Dynare is the following:

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 y = exp(c-y)*c + exp(i-y)*i + exp(g-y)*g ; 

Is it correct to do this? If not, how should I deal with it?

[jpfeifer]

No, that does not work this way. Y and y_t are different objects. Y is the steady state level of output, while y_t is the percentage deviation of output from its steady state, i.e.

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y_t=Y_t/Y-1

Usually you need to compute the steady state values and define them as parameters. Have a look at Pfeifer(2013): "A Guide to Specifying Observation Equations for the Estimation of DSGE Models" https://sites.google.com/site/pfeiferecon/Pfeifer_2013_Observation_Equations.pdf. There you can find an example.