Problem in solving SOE

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Problem in solving SOE

Postby bmicallef » Thu Jul 29, 2010 9:45 am

Hi everbody,

I am trying to replicate the SOE developed by Liu (2006): A small new keynesian model for the new zealand economy in dynare, so that eventually I will be able to estimate it for Malta. However, while I was able to replicate the model and IRFs using Uhlig's Toolkit, Dynare is giving me the following errors:

There are 4 eigenvalue(s) larger than 1 in modulus
for 5 forward-looking variable(s)

The rank conditions ISN'T verified!

??? Error using ==> print_info
Blanchard Kahn conditions are not satisfied: indeterminacy

Error in ==> stoch_simul at 44
print_info(info, options_.noprint);

Error in ==> Liu_replica at 212
info = stoch_simul(var_list_);

Error in ==> dynare at 125
evalin('base',fname) ;

Any help on how to resolve this issue? Why are the BK conditions not satisfied in Dynare when no such problems were identified with Uhlig's toolkit?

Eventually, I will have to adapt the model for a country that's in a monetary union (fixed exchange rate regime). As a result, the interest rate will be determined exogenously rather than set by the home central bank via a Taylor Rule. Any ideas on how to do this?
Attachments
Liu_replica.mod
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Liu_2006.pdf
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Re: Problem in solving SOE

Postby AssiaEzzeroug » Thu Jul 29, 2010 12:47 pm

Hi,

this is a dynare timing convention issue associated with the real exchange rate (q) in the model;basically you can't use the same timing as in that paper. but it should work if you add the instruction "predetermined_variables q;" or change directly its timing by lagging "q" of one period.

Best
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Re: Problem in solving SOE

Postby bmicallef » Sat Jul 31, 2010 7:39 am

When I've use the command 'predetermined_variables', the following error appeared:

??? Undefined command/function 'predetermined_variables'.

Error in ==> Liu_replica at 152
predetermined_variables q;

Error in ==> dynare at 125
evalin('base',fname) ;

The model worked when I lagged the real exchange rate (q) by 1 period but the IRFs were different from the original paper, both qualitatively and quantitatively!

Any help on how to solve this issue?

To be sure, I'm using dynare version 4.1-alpha1
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Re: Problem in solving SOE

Postby AssiaEzzeroug » Sun Aug 01, 2010 4:58 pm

thats curious... because this instruction works for me (see the attached file)

Best

NB: I use the latest version of dynare
Attachments
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Re: Problem in solving SOE

Postby jpfeifer » Sun Aug 01, 2010 6:01 pm

Hi, could you provide some intuition as to why the real exchange rate is a predetermined variable? It makes sense that capital or Bonds are predetermined in such models as they are determined already in the previous period (end of period notation). Why does this by convention apply to the real exchange in Dynare, when this variable is for example contemporaneously influenced by monetary policy?
------------
Johannes Pfeifer
University of Cologne
https://sites.google.com/site/pfeiferecon/
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Re: Problem in solving SOE

Postby bmicallef » Mon Aug 02, 2010 3:48 pm

I have downloaded the latest version and the IRFs are still qualitatively and quantitatively different from those of the original paper. So there must be something else that I'm missing with Dynare code (although, as I've said before, the same equations with Uhlig's toolkit works fine!). Any insights on why?

I would also appreciate if you expand further on why the real exchange rate should be considered a predetermined variables.
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Re: Problem in solving SOE

Postby MichelJuillard » Wed Aug 04, 2010 9:48 am

There is something weird with the paper. The Appendix lists 14 equations but there are only 13 variables. This forces you to combine the Euler equation and the international risk sharing equation but there is no theoretical grounds to do so.
Also, on page 15, the author lists pi_h in y, among "other endogenous variables", but pi_h appears with a lag in the model.
If you want to understand why Dynare and Uhlig's Toolkit give different results, you should
1) compare the eigenvalues. If the eigenvalues are different, there is a difference in the models that you entered in both program
2) if the eigenvalues are the same, you should verify the Blanchard and Kahn condition by comparing the number of explosive eigenvalues and the number of forward looking variables.

Best

Michel
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Re: Problem in solving SOE

Postby jpfeifer » Wed Aug 04, 2010 3:47 pm

Does this mean that the comment about the predetermined exchange rate is obsolete and there is something else wrong?
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University of Cologne
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