Colinearity between equations

Stochastic simulations
1

Hi, I have a two-sector model with sectoral and an aggregate Phillips Curve Equations featuring relative prices. The model is a bit complex. It has 15 variables, 49 calibrated parameters, and four shocks. It involves matrices that are evaluated in Matlab, whose entries are then entered in Dynare. I’m trying to simulate it but I keep getting the usual indeterminacy and colinearity issues.

Any ideas? :pray:

master.m (3.7 KB)
model_a.mod (5.2 KB)

2
  1. The collinearity is expected as your model contains the price levels, which have a unit root.
  2. Your model does not satisfy the Taylor principle as zeta<1. Set it to e.g. 1.5 and the model runs.
1 Like
3

Thanks Johannes. Noted for 1, and beginner’s mistake for the Taylor principle!