Hi everyone,

I wrote a DSGE model with emissions and monetary policy in which stationary states are the variables written in uppercase. The problem is that when run the monetary shock (ev), I have a change in the potential output and the reduction in the current output, which is not possible. The monetary shock reduces the interest rate and should increase production. Can anyone tell me where the error is? Thanks in advance.

nek.mod (1.9 KB)

Did you try whether a model without these features returns the right results?

Yes, the only difference with the basic NEK is that energy appears as a production factor and that emissions depend on energy. I attach the linearizations. I don’t think the problem is the parameters. The model seems to work with the technologicy shock, but the monetary shock gives wrong results. It is as if in the model it was not consistent with the theory.

linearizations.pdf (338.2 KB)

What happens if you have a tiny share of energy only? Because your model should nest the one without energy. That might give you a clue about the economics.

So I have to try to change the parameters, reducing the energy, until I get the correct result, right?

No, you stated that the model without energy works correctly. So the problem must appear when you introduce energy. One would expect that model with only bit of energy to still replicate the behavior of the model without energy. That may provide a clue why increasing the weight of energy changes the results.

Putting alpha = 1 and then using only work as input, the model doesn’t run because in some equations 1- alpha appears in the denominator.

That is why Johannes said “with only a bit of energy”. Although your case should nest the one without energy it’s possible for those limit cases not to work due to the issue you mention. Another example is working with a CRRA function or CES function. These nest the Log and Cobb Douglas function but you cannot just change the parameters to 1.

Try something like alpha = 0.99 if it runs as expected then you know the root of the problem is this new sector with a higher share.

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