Dear All,

I believe not to have fully understood how to set observables in the steady_state_model block.

**After adding observables, the model steady_state block provides residuals different from zero.**

(dynare_estimation_init:: The steady state at the initial parameters cannot be computed.)

I am trying to estimate the Ascari, Castelnuovo and Rossi 2010 paper on NK with trend inflation starting from the code kindly provided on Prof. Pfeifer’s website: https://github.com/JohannesPfeifer/DSGE_mod/tree/master/Ascari_Sbordone_2014

The idea is to use 3 observables (GDP deflator, real GDP, fed-fund-rate).

I have transformed the series following the paper “A Guide to Specifying Observation Equations for the Estimation of DSGE Models”:

In general:

- log the data.
- take first difference - for the GDP, I use the cycle extracted with HP filter although I know it is not advised.
- I get a stationary time series with mean zero.

Model:

The dynare code is written in exp form.

At this point all the variables are interpreted in logs and have non-zero steady state - y_ss.

So, my observables should be specified in the model block as:

y_obs = y - y_ss (as in listing number 7 of the paper)

**Is this reasoning, correct?**

Then, I have added the observables to the steady_state_model block in the following way:

Pi_bar = (1+trend_inflation/100)^(1/4); %set Pi_bar to reflect quarterly inflation

pi=Pi_bar;

i=1/beta*Pi_bar-1;
i_bar=i;
y=(p_star^(1+(epsilon*alpha)/(1-alpha))

*(epsilon/((epsilon-1)*(1-alpha))

*((1-beta*theta

*Pi_bar^((epsilon-1)*(1-var_rho)))/(1-beta

*theta*Pi_bar^(epsilon*(1-var_rho)/(1-alpha))))

*d_n*s^phi_par)^(-1))

^(((phi_par+1)/(1-alpha)-(1-sigma))^(-1));

Y_bar=y;

…

**Pi_obs=Pi_bar;**

**y_obs=Y_bar;**

**i_obs=1/beta*Pi_bar -1**;

end;

I attach my files below.

**In general, what is the logic to be followed in this step?**

I am new to this subject and any comment, reference or advise would be of great help.

Many thanks in advance!

estim_asc.zip (7.4 KB)