When I use the above monetary policy, the model can run normally. But when I change the monetary policy to the following, the residual of the model is not zero. What is the reason for this?
@jpfeifer
Hi wangshiye,
this is because \frac{B-B_{t-1}}{B_{ss}} is in steady state not the same as \frac{B}{B_{ss}}. Try just using \frac{B}{B_{t-1}} instead, this should work.
The reason is that you make the left hand side as well as the right hand side equal to 1 in steady state, for example \frac{R}{R_{ss}}=1 in steady state. As are all the other terms in your first equation. But for the term I mentioned above this is not the case, hence the residual.
Hope this answers your question.
I understand what you mean. Thank you so much. So if I want to make monetary policy in response to credit growth, how should I set it?
Like I said in my previous post: Try using \frac{B_t}{B_{t-1}} in your monetary policy rule.
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Thank you for your swift reply. It really solves my problem.
Best regards