B+K violated in two sector model

Stochastic simulations
1

Hello,

I am trying to get non-linearized 2-sector NK model to work in Dynare - While the steady state seems fine, I am getting a violation of the B+K conditions. I have no predetermined variables (capital) as labor is the only input to production. I think the Taylor rule is stabilizing.

When I run model_diagnostics(M_,options_,oo_), I find one colinear relationship for basically all of my price and wage variables for both the sectors in my model. I am wondering if this is a mistake-driven error or if I am missing conditions to properly identify the model.

Any help is much appreciated (annotated mod attached)
2sectormodel.mod (4.3 KB)

2

The equations

PI = (P/P(-1)); // aggregate inflation
PI_g = (P_g/P_g(-1)); // goods inflation
PI_s = (P_s/P_s(-1)); // serv inflation

imply a unit root in prices, which explains the collinearity. This is a well-known feature of the New Keynesian model.

Why don’t you have predetermined variables in your model? Usually, there is price dispersion somewhere.

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