Dynare Model Gali Monacelli with Tradable and Non Tradable

Hi everyone,

I’d like to have your help in this model. I structured a Gali & Monacelli model with Tradable and Non-Tradable sector. The main issue concerns the Exchange Rate Peg, in particular how to obtain it in this model. What I use to mimic it is as follow:

  1. imposing 'r = rf ’ (that is nominal national interest rate equals to the foreign one) in the Monetary Policy Rule. So that also the UIP equation becomes just ‘dee = 0’ (that is Delta Nominal Exchange Rate equals to 0);

OR

  1. imposing an infinit number (very high) to the coefficient that link ‘dee’ (Delta Nominal Exchange Rate) to ‘r’ (Nominal Interest Rate), in the Monetary Policy Rule and leave all the rest unchanged;

My real problem is about Impulse Responses: I don’t understand why IR for Output, Consumption, RER Tradable (Real Exchange Rate for Tradable goods), Terms of Trade etc. show a persistent Impulse Response instead of converging back to the steady state.

Thank you in advance for your consideration, I’d really appreciate your help, even a more “general help” in implementing the model in Dynare. I’m a beginner…

Best,

Andrea

P.S: in Dynare, ‘h’ means home tradable, ‘n’ means non-tradable, 'f ’ means foreign tradable, ‘t’ means tradable. For example ‘q’ is RER, ‘qt’ is RER-Tradable, ‘qn’ in RER-Non Tradable, ‘mch’ is marginal cost for home tradable, ‘mcn’ for marginal cost non tradable. (cause tradable has inside home and foreign).

The reason is that your model has a unit root. Finding out why is a economic issue depending on your model.