I have never worked with Dynare 3. However, for Dynare 4, your steady state file is ill-suited as it does not supply the correct steady state but rather starting values. In this case, Dynare takes these values as steady state values and does not try to solve further. Moreover, the required lines of code are missing in the steady state file to enable Dynare to run with it (see [Steady state file)).

You now have two possibilities:

- You delete the steady state file and set

`steady; `

to

`steady(solve_algo = 3);`

in the mod-file. Dynare will then find the steady state by using Chris Sims’ solver, which gives you an approximately correct steady state (some rounding error is involved)

- You use the attached steady state file where I added the required lines at the beginning and the end of the code and added the correct exact steady state values.

TwoBlocks_base_steadystate.m (991 Bytes)