An infinity of steady states with Taylor rules

Steady state
8

No. Usually, you have a Taylor Rule of the form

R/Rbar=(pi/pi_bar)^phi_pi

You set pi_bar in the parameter initialization instead of trying to use steady_state(pi). The reason is that steady state inflation is not endogenously determined. Given the value for pi_bar, you use

#R_bar=1/beta*pi_bar

to set the nominal interest rate.

Regarding the peg problem, there often occur problems in open economy model with closing the model. First make sure the model solves for the individual countries. Then, after this works, close the model by linking the two economies using a peg.

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