i want to simulate the Branch & McGough (2009) model for my master thesis. There are rational agents with fraction alpha and “adaptive” agents with fraction (1-alpha) in the model. In order to simulate the model with an optimal targeting rule i derived (not in the code here), i need to have the consumption of the rational agents (cr) as a further variable. In order to do so, i included their euler equation as follows:
//Phillips curve pi = alpha*beta*pi(+1)+(1-alpha)*beta*(theta^2)*pi(-1)+kappa*y+cps; //IS y = (alpha*y(+1)+(1-alpha)*(theta^2)*y(-1))-sigma*(i-alpha*pi(+1)-(1-alpha)*(theta^2)*pi(-1)); //Consumption euler of rational agents cr =cr(+1)-sigma*(i - pi(+1)); //Taylor rule i = phi_pi*pi + phi_y*y; //Cost push shock cps = rho_cps * cps(-1) + e_cps;
However, dynare returns that there are eigenvalues greater than 1 in absolute value. Without the euler equation the simulation works just fine. I probably have to miss something very obvious here. Can anyone help with that, please?