Discretionary policy Steinsson 2003


#1

Hi everyone,

I’m trying to replicate Figures 1-9 of “Optimal monetary policy in an economy with inflation persistence (Steinsson, 2003)”. https://github.com/tkksnk/qmme/blob/master/Steinsson%202003%20JME.pdf

I successfully replicated the commitment case, but I struggle solving the discretionary case.

Especially, Dynare sends me an error message I don’t understand:

“Error using discretionary_policy_1 (line 91)
discretionary_policy: the model must be written in deviation form and not have constant terms”

Thanks in anticipation!

Best wishes,
Thorstenfinal_disc_theoretical.mod (1.7 KB)


#2

Your exogenous shock function eta has a constant term

 -(1-alpha)*(1-alpha*beta)*(1-omega)/((omega*(1-alpha+alpha*beta)+alpha)*(1+psy^(-1)*thetabar)*thetabar)*tau

that is not allowed in Dynare’s discretionary_policy-routine.