BK conditions not satisfied: Help

Dear all,

I want to implement the model of Marcellino & Rychalovska (2014): Forecasting with a DSGE Model of a Small Open Economy within the Monetary Union but I get the well-known message: Blanchard Kahn conditions are not satisfied: indeterminacy

Can anyone take a look into my code? Attached you can find the paper and the code. Model equations are presented on pages 321-324 in the paper.

Thanks a lot.

Best
Marcellino_et_al-2014-Journal_of_Forecasting.pdf (779.2 KB)
DSGE.mod (9.9 KB)

This is hard to tell. I can only recommend checking all equations again, both in the paper and in your code. You may want to use Dynare’s LaTeX capabilities to make your life easier.

Dear prof. Pfeifer

I’ve checked the complete set of linearized equilibrium conditions and the timing again, but without success. The BK conditions are still not satisfied.

The code is attached.

DSGE_ver1.mod (9.7 KB)

I’m getting in touch to ask if you can give me any additional advice or direction about that.

Thank you.

Your model now has a unit root that affects real variables (use model_diagnostics). This is very unusual.

Could the unit root come from equations like:

RS_hat = (1-alpha)*p_FH_hat; // Real exchange rate, where p_FH_hat denotes the terms of trade

p_H_hat = -alpha*p_FH_hat; // Domestic relative price P_H/P = p_H

pi_hat = pi_H_hat + alpha*(p_FH_hat-p_FH_hat(-1)); // CPI inflation

RS_hat = RS_hat(-1) + pi_star_hat - pi_hat + epsilon_rs_hat; // Real exchange rate dynamics

I just rewrote the equilibrium conditions presented in the paper (Marcellino&Rychalovska, 2014) into my code. The paper was published in Journal of Forecasting. It is also worth mentioning that their model is very closely related to the papers by Gali & Monacelli (2005) and De Paoli (2009) with the exception that the small open economy is assumed to belong to the common currency area with the foreign economy: R_hat = R_star_hat, where

R_star_hat = omega_r×R_star_hat(-1) + (1-omega_r)×(phi_pi×pi_star_hat + phi_y×y_star_hat + phi_delta_y×(y_star_hat-y_star_hat(-1))) + epsilon_r_hat; // Foreign interest rate

It could come from these equations. Maybe there is still a mistake in the transformations.