2 Country portfolio model to study exchange rate dynamics

Hi all,

First post here and I’m a new user. Great work by the developers!

I’ve been trying to replicate the model from chapter 1 of Evans’ “Exchange Rate Dynamics” (2011).

I have a feeling there’s something wrong in the structure of the model, i.e. inclusion of an irrelevant and exclusion of a relevant equation but I don’t know how to check this explicitly.

It runs but, even with 1 million newton iterations, it can’t find a steady state. It could also be an issue with the initial condition but I have a feeling it is not. I’ve been looking at residuals of eqautions when trying to set it.

So the error exactly is:

Error using print_info (line 74)
Impossible to find the steady state. Either the model doesn’t have a steady state, there are an infinity of steady states, or
the guess values are too far from the solution
Error in steady (line 92)
print_info(info,options_.noprint, options_);
Error in evansv3 (line 323)
Error in dynare (line 180)
evalin(‘base’,fname) ;

Attached is the LaTeX file listing equations and parameter values and the .mod file.

Thank you,
categorical.pdf (140 KB)
evansv3.mod (5.79 KB)

While I haven’t read that handbook chapter, I assume all your parameters are set exactly according to his? Have people pointed to indeterminacy of that model since 2001? How close are the residuals that prevent the steady state from converging?

All parameters, barring two. One of them has a suggested range and mine was within it. The other wasn’t specified so I used it to eliminate the residual of two equations.

I was messing around trying to get an initial condition and I thought a resudual for each less than 0.05 was close enough, although in the uploaded mod file, this isn’t always the case.

There were two sets of equations to which I couldn’t work out initial values in the way that when I tried to decrease the one residual, the other would increase always. These equations were for return to capital and the firm optimising first order condition.