Collinearity issue in simple two country model


Dear all,

I am trying to replicate the baseline model of this paper:

it should be pretty easy to replicate, but I keep getting a collinearity issue.
I know that often prices are not determined in these models, but a version of this code with inflation instead of the price level does not solve the problem.
I’m wondering if there is something obvious that I do not immediatly see.
I would greatly appreciate if anoyone could give me his opinion on this. Thanks in advance,

fxforecast_steadystate.m (1.4 KB)
param_FX.m (794 Bytes)
ss_FX_new.m (4.4 KB)
fxforecast.mod (6.5 KB)


This more seems like an issue with closing the model as a lot of real variables are involved. Either there are still bugs in your coding or there is a conceptual problem (missing equation)


Dear Johannes, yes indeed.
In the end we found a solution over the weekend and now we have a working code. The point was (as often is) to get a correct definition of inflation and prices. The model needs to have on unit root (the nominal exchange rate). To correctly code that in it was necessary to transform intermediate prices in relative prices. Doing that the model works and correctly replicates the IRFs of the paper.

Thank you for your help,