Forward looking & predetermined variables

Stochastic simulations
2

  1. The difference between “forward-looking variables” vs. “predetermined variables” has to do with conditional expectations. In your example, Dynare treats the statement
    x(t+1) = Ax(t) + b, (x is forward-looking) as E_t x(t+1) = Ax(t) + b.
    In contrast, in x(t) = Ax(t-1) + b. (x is predetermined), you could also add an conditional expectation at time t, but it would be redundant. Due to this conditional expectations operator, both statements are not (!) the same.

  2. I am not sure if Dynare is the right application to solve static problems like the one you mention. I guess your code should look like this:

var Qdemand Qsupply Price;
varexo shock1 shock2;

model;
Qdemand = Qsupply;
Qdemand = 200 - 5*Price + shock1;
Qsupply = 25 + 12.5*Price + shock2;
end;

shocks;
var shock1; stderr 0.01;
var shock2; stderr 0.01;
end;

stoch_simul(order=1);

Of course, you get an error message, when autocovariances are computed, which is natural as there is no intertemporal link in your model.