# 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.