I am currently using Dynare to estimate the parameters of an DSGE model with financial frictions. When I use calibrations from the literature I get a stable solution and are able to conduct simulations. Now I want to estimate the parameter using ML and I get the following error (Blanchard & Kahn conditions are not satisfied: no stable equilibrium.):
Error in computing likelihood for initial parameter values
ESTIMATION_CHECKS: There was an error in computing the likelihood for initial parameter values.
ESTIMATION_CHECKS: If this is not a problem with the setting of options (check the error message below),
ESTIMATION_CHECKS: you should try using the calibrated version of the model as starting values. To do
ESTIMATION_CHECKS: this, add an empty estimated_params_init-block with use_calibration option immediately before the estimation
ESTIMATION_CHECKS: command (and after the estimated_params-block so that it does not get overwritten):
Blanchard & Kahn conditions are not satisfied: no stable equilibrium.
How do I deal with this error since the base model should be stable due to the simulations with calibrated values?
Addendum: running the model_diagnostic command returns the following error message
model_diagnostics(M_,options_,oo_)
MODEL_DIAGNOSTICS: The Jacobian of the static model is singular
MODEL_DIAGNOSTICS: there is 2 colinear relationships between the variables and the equations
Relation 1
Colinear variables:
p
h
AUX_ENDO_LAG_11_1
Relation 2
Colinear variables:
p
h
AUX_ENDO_LAG_11_1
Relation 1
Colinear equations
Columns 1 through 16
1 3 4 5 6 7 8 9 10 11 12 14 15 17 20 21
Column 17
22
Relation 2
Colinear equations
3
MODEL_DIAGNOSTICS: The singularity seems to be (partly) caused by the presence of a unit root
MODEL_DIAGNOSTICS: as the absolute value of one eigenvalue is in the range of ±1e-6 to 1.
MODEL_DIAGNOSTICS: If the model is actually supposed to feature unit root behavior, such a warning is expected,
MODEL_DIAGNOSTICS: but you should nevertheless check whether there is an additional singularity problem.
MODEL_DIAGNOSTICS: The presence of a singularity problem typically indicates that there is one
MODEL_DIAGNOSTICS: redundant equation entered in the model block, while another non-redundant equation
MODEL_DIAGNOSTICS: is missing. The problem often derives from Walras Law.