Greetings. This is my very first post.
After some practice with smaller models in Dynare, I have some questions as I work on my first big project, so I decided to kindly ask for your help. The program does run well, but I have some questions.
The model I’m programming comes from the paper “Nominal Debt Dynamics, Credit Constraints and Monetary Policy” by Graham and Wright (2007). It’s a DSGE model without money in which households are split between those having binding credit constraints and those that do not, only a known proportion of loans are given on fixed rate scheme, and some of the ones on variable rate scheme change terms with a Calvo-like process.
I’m attaching the pages from the document that show the linearized model.
My questions are as follows:
If my variables are meant to be log-linearized deviations from their nonstochastic steady-state values, did I do well in writing them as exp(variable)? And if so, was I right in choosing 0 as the initial value to all of them? The user manual mentions doubling the variable name to indicate that it’s a deviation, but how do you do that when the variable name has more than one letter? I also wrote “linear” when declaring the model, since it was already linearized.
After running the program, it tells me that the steady state value for ALL my variables is -1. I do not understand why.
This is what I did:
var y c1 c2 pi z d r rd rf rz n1 n2 w1 w2 mc;
predetermined_variables z rz;
parameters delta lambda kappa N eta beta1 beta2 gamma phi psi sigmac
/*I’m writing in capital letters the levels of the variables, whereas
the lowercase refers to log-linearized deviations from steady state. The variables are the following:
Y: Income, C1: consumption of unconstrained households, C2: consumption of
constrained households, Pi: Inflation, Z: value of a new debt contract,
D: level of debt that financial institutions are willing to lend,
R: short-term interest rate established by the central bank, which,
by assumption is the rate payable on floating rate loans with a spread of zero,
Rd: average rate payable on loans, Rf: fixed average rate payable on loans,
Rz: rate payable on new loans, N1: labor supply for unconstrained households,
N2: labor supply for constrained households, W1: real wage for unconstrained
households, W2: real wage for constrained households, MC: real marginal
cost, U: white noise “cost-push” shock. */
/Quarterly steady state debt to consumption ratio of constrained households/
/Consumption share of unconstrained households/
/Labor income share of unconstrained households/
/Steady state labor supply/
/Coefficient of lagged inflation in Phillips curve/
/Discount factor of unconstrained households/
/Discount factor for constrained households/
/Coefficient on marginal costs in Phillips curve/
/Debt reset probability/
/Proportion of borrowers in fixed scheme/
/Intertemporal elasticity of substitution for consumption/
/Intertemporal elasticity of substitution for labor/
/Coefficient in monetary policy rule/
/*Note about some of the equations: The derivation for GW's equations 49 and 50 can be found in a pdf I'm attaching.*/