Hello!

I have specified a basic 2 country DSGE model with price and wage rigidities, as well as incomplete international bond markets. The model is specified in nonlinear terms and it runs fine.

However, Dynare cannot compute the theoretical moments of some variables

VARIABLE MEAN STD. DEV. VARIANCE

Welf_H NaN NaN NaN

Util_H NaN NaN NaN

R_H 9.4538 0.0165 0.0003

infl_H 8.3700 0.0211 0.0004

r_H 1.1298 0.0195 0.0004

Q_H -4.5229 0.1171 0.0137

Y_H NaN NaN NaN

K_H NaN NaN NaN

H_H NaN NaN NaN

I_H NaN NaN NaN

C_H NaN NaN NaN

MC_H 22.6730 0.0261 0.0007

R_F 9.7114 0.0163 0.0003

S NaN NaN NaN

rer NaN NaN NaN

tot NaN NaN NaN

infl_F 9.1610 0.0214 0.0005

r_F 1.0470 0.0195 0.0004

Q_F -3.5885 0.1183 0.0140

Y_F NaN NaN NaN

K_F NaN NaN NaN

H_F NaN NaN NaN

I_F NaN NaN NaN

C_F NaN NaN NaN

MC_F 14.6085 0.0268 0.0007

If I understood correctly, this is caused by the presence of unit roots in the model. It is indeed the case that 4 of the eigenvalues are equal to 1.

Can anybody explain me what shall I do to eliminate those unit roots? Please note that I didn’t includ price levels in the model, only relative prices and inflation rates. Furthermore, an international risk premium is already present, in the spirit of Schmitt-Grohe and Uribe, which should stabilize the behavior of net foreign assets.

The .mod file is attached.

Thank you for your help!

Mary

NK2C_welfare.mod (11.4 KB)