Exchange Rate Regime in non-linear Gali-Monacelli model

General DSGE Modeling
1

Hello evryone,

I have set-up a non-linear version of the Gali-Monacelli model with some additional ingredients. Basically: a) indexation of producers to past inflation and, b) stabilization of government debt through taxes.

Following a contractionary foreign interest rate shock (increase in R^W), I don’t observe that output and consumption contract more in the fixed vs the flexible exchange rate as we should expect. In fact, the response of all real variables is very very similar not only qualitatively but also quantitatively.

Here are the matlab codes for the fixed and flexible exchange rate regimes: “main_model_fixed”, “main_model_flex” and their corresponding .mod files: “model_gov_fixed.mod”, “model_gov_flex.mod”:

main_model_fixed.m (6.3 KB)

model_gov_flex.mod (8.6 KB)

model_gov_fixed.mod (8.6 KB)

main_model_flex.m (6.3 KB)

These are the plots I get (blue is flexible and red is fixed):

image
image940×1562 89.1 KB

Any idea of why I am getting these results?

Thank you very much in advance

2

That is hard to tell and I don’t have a good intuition how that model should behave. A standard way to gain a better intuition is varying parameters to see what drives this result.

3

Thank you for the answer Johannes. I found the error. There was a mistake with the timing of one equation. Instead of being: exp(pH)/exp(pH(-1)) = exp(PI_H)/exp(PI(-1)); it should be exp(pH)/exp(pH(-1)) = exp(PI_H)/exp(PI).