Hello everyone, I try to run the attached open-economy model that I have build, before that, my model was in closed economy and it worked well. I have introduced the simplest way to move from a closed to an open economy. I just have added the features necessary for imports-exports (no foreign debt)…

The problem is not the collinearity (yet). You model features explosive behavior. Most probably it’s an issue with the fiscal rules.

Dear Mr Pfeifer, Thanks for you reply, in fact I changed my fiscal rule by setting zeta=0 and increasing the fiscale brake lambda_b from 0.01 to 0.05, now the model runs, BK are satisfied, but the model diagnostic still tells me that I have collinearity, also when I look at my IRFs some variables d…

I don’t think this is uncommon. See e.g. [image] Uribe & Schmitt-Grohe Replication Attempts You seem to be confusing things here. The basic small open economy model is non-stationary, but it has nothing to do with growth where writing everything in intensive form removes t…

But in Schmitt-Grohe, the problem is linked to foreign debt if I’m correct but in my model , I just have exports and imports, no foreign debt, that’s why it looks weird. Don’t you think it is linked to one of my open economy equations ? Again, thanks for you reply.

Use irf=2000 to see which variables are affected. That often helps. When you say [image] Hugo_15: I just have exports and imports, no foreign debt are you saying that your model features balanced trade, i.e. imports always equal exports? Because without a net asset position to draw from. how…

Yes exactly, I just have a BOP condition stating that X=eM where e is the real exchange rate, imports M are just equal to home consumption of foreign goods (Cf). That’s very simple and I do not see why it may be not correct…

But where is the unit root in your model, i.e. which variables are affected.

Dynare tells me that it is linked to equation 8, 11, 29,30. And it tells me that 21 variables of my model are collinear. Is it your question ?

No, the question is which variables display NaN theoretical moments and do not return to steady state in the IRFs.

When I look at theoretical moments (mean, variance) , no variable display NaN. However when I look at the IRF , a lot of variables do not go back to their steady-state but in my view it is induced by the lack of convergence of the variables linked to the open-economy framework ( exports, imports, co…

collinearity/Bk problem

Stochastic simulations

jpfeifer 5 May 2021 11:00 4

I don’t think this is uncommon. See e.g.