How can deal inflation and price since prices donot has S.S

Dynare help (legacy posts)
1

I do not know how to deal with Price and Inflation in mod file:
pi = P/P(-1);
if inflation pi has steady state 1.005 for quarterly data, and Price does not have a steady state at all. I am not sure it is work in dynare or not if I put it in my mod file?
I want to recover the IRF for price level after a monetary policy shock. So I need to have price level input.

1 Like
2

In many models (e.g. interest rate rule) the price level is non-stationary, so you cannot have prices in the model. They will not return to a steady state. I am not sure what you want to do, but you can recover the IRF for prices from the inflation rates by noting the definition of prices. We have that
log(Pi)=log§-log(P(-1))
This implies that
log§=log(Pi)+log(P(-1)).
If you assume that P(0)=1, you can use the IRF for inflation to manually recover the price level. The procedure is similar to recovering the IRFs of nonstationary output after a permanent technology shock as shown in the Aguiar/Gopinath (2007) mod-file on my homepage.

1 Like
3

Thank you very much!
Is there any way to deal with non-stationary variables in Dynare?
Is Unit_root_var command still available?

4

What you mean with “deal with non-stationary variables”? For stoch_simul, unit roots are no problem.

1 Like