Credit and Banking with Probability of Default

Dear everyone,
I am modifying the codes of Gerali, Neri, Sessa and Signoretti:

“Credit and Banking in a DSGE Model of the Euro Area”

I am doing it because i am adding default probability of entrepreneurs. I am attaching these codes modified. After run in dynare I got this results:

Impossible to find the steady state. Either the model doesn’t have a steady state, there are an infinity of steady states, or the guess values are too far from the solution.

So I am log-linearizing each equation, and I am calculating steady state values by hand. In this transformation, I got one log-linear equation (wage-Phillips curve) of this form:

y(t) = a + b*x(t)

where by definition: y(t) = log(Y(t))-log(Y_ss) and x(t) = log(X(t))-log(X_ss). And “a” and “b” are parameters.

I’ve already checked if the transformation is OK.
In the models I have studied the log-linearized equations never have a constant term like “a”. So my question are:

  1. ¿It is right this linear form? It is normal?
  2. In steady state y(t)=x(t)=0. ¿Does this imply that a = 0?

Please I would appreciate it if you could reply to my question early.

Thanks in advance.


Nice day

median_values.txt (675 Bytes)
Rodriguez.mod (15.7 KB)

This cannot be unless a is 0. It looks as if you made a mistake in the linearization.

Note that linearization usually does not help you to avoid computing the steady state. While the steady state in percentage deviations from steady state is now trivial, the steady states for the level of the variables is typically needed as a parameter. So you still need to compute it.