I’m trying to replicate some impulse responses to a credit shock (theta). The problem in my simulation is the interest rate rule which the central bank follows: r_s = r_star + nu*theta, where r_star is the natural rate and nu is a parameter, which is a combination of several other parameters of the model (please see attached). r_star as well as theta follow exogenous AR(1) processes.
When I try to run the code, I get the following error message:
There are 2 eigenvalue(s) larger than 1 in modulus
for 3 forward-looking variable(s)
I think it’s because the 5th equation (the policy rule) is a combination of two other equations in the model which leads to indeterminancy (am I right?)
Could you please help me with this issue? I’m not experienced in dynare yet and would be glad to receive a hint how to adjust the model to make the code work.
Thanks a lot.probe3.mod (1.4 KB)