# Colinear problem

**URL:** <https://forum.dynare.org/t/colinear-problem/21271>\
**Category:** Stochastic simulations\
**Created:** [22 October 2022 13:09 UTC](https://forum.dynare.org/t/colinear-problem/21271 "2022-10-22T13:09:50Z")\
**Posts on this page:** 2\
**Page:** 1

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**Author:** ![curry](https://forum.dynare.org/letter_avatar_proxy/v4/letter/c/a5b964/32.png) [@curry](https://forum.dynare.org/u/curry)\
**Post date:** [22 October 2022 13:09 UTC](https://forum.dynare.org/t/colinear-problem/21271/1 "2022-10-22T13:09:50Z")

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[GH3.mod](https://forum.dynare.org/uploads/short-url/kUju4mcrr50RqX4F290wff5jMSR.mod) (4.2 KB)  
[GH3\_ss.m](https://forum.dynare.org/uploads/short-url/tjHkbj21NPP28Q31am7v8JRAT1E.m) (1.8 KB)  
[GH3\_steadystate.m](https://forum.dynare.org/uploads/short-url/eMAuuxFCFNQQR1R79B6tj2IQiC7.m) (1.5 KB)  
[GH4.mod](https://forum.dynare.org/uploads/short-url/9JsTnFJn2M3DcOKtGkRzWdvZuvd.mod) (3.8 KB)  
[GH4\_ss.m](https://forum.dynare.org/uploads/short-url/b8jvXbrKvnoBwFeLBXWZz5fhGTu.m) (1.8 KB)  
[GH4\_steadystate.m](https://forum.dynare.org/uploads/short-url/6tC1du1XUlxrlkjFErWUmOEh7Lq.m) (1.5 KB)  
[param\_GH.m](https://forum.dynare.org/uploads/short-url/jna8Pe3iTJvcdfugqyc1bz5CQ4n.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.

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**Author:** ![jpfeifer](https://forum.dynare.org/user_avatar/forum.dynare.org/jpfeifer/32/5044_2.png) [@jpfeifer](https://forum.dynare.org/u/jpfeifer)\
**Post date:** [23 October 2022 12:18 UTC](https://forum.dynare.org/t/colinear-problem/21271/2 "2022-10-23T12:18:35Z")

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

> [@Simple NK Model](https://forum.dynare.org/t/simple-nk-model/5018/13):
>
> 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…