Colinear problem

[curry]

GH3.mod (4.2 KB)
GH3_ss.m (1.8 KB)
GH3_steadystate.m (1.5 KB)
GH4.mod (3.8 KB)
GH4_ss.m (1.8 KB)
GH4_steadystate.m (1.5 KB)
param_GH.m (840 Bytes)
Dear professor,
I am doing a two sector with banks. I have encountered the unit root problem. My initial model is in GH3.mod. When I remove the bank sector and the open economic setup, the model could run well in GH4.mod. However, when I add these parts in GH3.mod, the model reports colinear problem, and I could not get the var of variables. I have checked the model for numerous times and could not find where the error comes from. Could you help me to find out the problem in GH3.mod, Thanks.

[jpfeifer]

How did you solve the typical unit problem in small open economy setups? See

Simple NK Model

A classical example is Schmitt-Grohe/Uribe’s (2003) paper on closing small open economy models. There is a unit root in the net foreign asset position if interest rates are constant/do not react to asset positions. Solutions in their case were to have a debt elastic interest premium or an endogenous discount factor. In closed economy models you can generate something similar by having a borrowing constraint where the Lagrange multiplier on the constraint increases in debt and therefore creates a…