Hi,

I want to construct a small open economy DSGE model, where there will be two Ricardian households and one non-ricardian. I tried to write a model, but got a problem with colinearity, as I had two Euler equations. So, is it possible to somehow correct the model?

It all depends on the type of collinearity. Unit roots are sometimes expected. Problematic are true singularities.

[name = ‘Euler equation for domestic bonds 1’]

mu_R_1(+1) - mu_R_1 + R - pi(+1) = 0;

[name = ‘Euler equation for domestic bonds 2’]

mu_R_2(+1) - mu_R_2 + R - pi(+1) = 0;

Dynare tells me that these two equations are collinear. mu_R_1 is the marginal utility of 1st Ricardian household, mu_R_2 is the marginal utility for the second Ricardian household, R is interest rate, pi is inflation. How can I solve this problem, do You have some suggestions?

Thank You in advance.

Did you have a look at