I am trying to work with the model in “optimal monetary policy under low trend inflation”. I have done the basic coding (which I double checked and is correct) and now want to estimate the model. The model has trend inflation.

I am following the instructions closely from the excellent handbook: A guide to specifying observation equations for the estimation of DSGE models. On page 43, the authors describe how to estimate this type of a model (equations 43 and 44).

I follow equations (43) and (44) to the letter. For output and real balances, I use: first difference of log GDP and first difference of log of real balances (money/price index).

However, I am having trouble estimating this model. The exact error I get is “POSTERIOR KERNEL OPTIMIZATION PROBLEM!”.I sense this is something to do with how I match my data with the model, but I am at a loss since I a followed all the instructions. Can someone have a look? The code and data are attached.

In the data file, the second sheet contains how I went from raw data to getting the data ready for estimation. The first sheet contains the data used in estimation.

trend.mod (1.8 KB)

usdata.xlsx (51.5 KB)