Hello! I encountered the following issue: when adding the government block to the log-linearized NK DSGE model, I get the following error: “There are 6 eigenvalue(s) larger than 1 in modulus for 5 forward-looking variable(s). The rank condition ISN’T verified!”
In the model, I add the following rule for government spending:
exp(g)/exp(STEADY_STATE(g)) = (exp(g(-1)) / exp(STEADY_STATE(g)))^rho_G * (exp(b)/(exp(y(-1)) * exp(p_SS)) * ((exp(STEADY_STATE(y)) * exp(p_SS)) / exp(STEADY_STATE(b))))^((1 - rho_G) * phi_G) * u_g
where
u_g = (1 - rhop_g) + rhop_g * u_g(-1) + e_ug.
The rule for transfers is defined as:
tr = STEADY_STATE(tr) + u_tr
where
u_tr = rho_tr * u_tr(-1) + e_tr.
The budget constraint is:
exp(b) = exp(p_SS) * exp(g) + R(-1) * exp(b(-1)) + tr.
In the steady state:
g = (y * nu_G) * p_SS;
b = nu_b * p_SS * y;
tr = (1 - R) * b - p_SS * g;
g = log(g);
b = log(b).
I do not use exp for tr (transfers) because in the steady state they turn out to be negative.
Could you please suggest how to fix this error? Without the government block, the model works correctly.