Gali Monacelli ('05) with foreign interest rate shock

Hi everyone,

I am trying to implement a foreign interest rate shock in a 2-country version of the Gali Monacelli ('05) SOE paper, adapting the code made available by Johannes Pfeifer . However, when I run the simulation I get the following error:

Error using print_info (line 37)
The generalized Schur (QZ) decomposition failed. For more information, see the documentation for Lapack function dgges:
info=11, n=9. You can also run model_diagnostics to get more information on what may cause this problem.

I suspect it might be because I express the interest parity condition as backward-looking, but if I express it as forward-looking the Blanchard-Kahn conditions are satisfied.

Thanks in advance for any help.

SOE2country.mod (6.0 KB)

Running model_diagnostics returns a collinearity issue related to the parity condition. Depending on your market structure, the UIP only holds in expectations, because the exchange rate change is not known in advance.

Dear professor Pfeifer,

Thanks for the help. Yes in the model the UIP only holds in expectations and I suspected that might be the cause of the problem. However, after writing it in expectations I get the same error. Any idea as to why it might still be the case? You can find the relevant .mod file attached.

SOE2country.mod (5.9 KB)

You sill have a collinearity issue. You need to find out why.