I will be grateful getting your advice on ways to improve my model. I spent several hours going through similar questions on the forum but still not clear.
I am following this paper with a bit of twist from C. Junior. I am able to reach the SS but facing two issues :
- Blanchard & Kahn conditions not satisfied, in order 2, even after setting qz_zero_threshold to 1e-30. The estimation works using order 1. But I am planning to introduce welfare analysis
- When I go for order 1 I am able to run but I see NaN in most theoretical moments, and unit roots and collinear equations issues after running model_diagnostics(M_,options_,oo_).
I read that a way to go about it in a NK model is to reestimate the model in terms of inflation instead of price level which is non-stationary. The problem is that the model is estimated in real terms (as in the paper) and none of the equations I am replicating is expressed in terms of inflation. Which makes me believe that the authors were able to work this out. Also, I have not seen a similar approach in C. Junior.
Please correct me if I am wrong and advise on ways to improve my model . Thanks a lot
Model_Dyn.mod (10.7 KB)