Dear friends, I have a question about log-linearization in DSGE models,
when we log-linearization an equation there is not be a constant, but some models have for example inflation target -as constant sentence- in their taylor rules that appear as constant in monetary policy. how can I solve this problem?
for example equation 9 in appendix article,
jom2012.pdf (421.5 KB)
No, when you linearize, you can cancel the constant on both sides of an equation. But there is no need to drop all constants. The only issue is that you need to be consistent in your implementation.
Dear jpfeifer thank you,
but how can I solve this problem in dynare? because dynare make an error when there is a constant in an equation.
for example in attached file the error “ERROR: If the model is declared linear the second derivatives must be equal to zero. The following equations have non-zero second derivatives:
* Eq # 3 [pi]”
how can be solved, without eliminating something?
In that case, there must be a mistake in your linearization. A simple constant will drop out after twice differentiating. The error message tells you that is not the case.