Question as in the title. Usually, we need to specify the number of state variables and compare the number with explosive eigenvalues. How can we do it in dynare?
Also Have you guys figure out how to deal indeterminacy like those in Farmer & Guo (1994) or Wen (1998) in dynare?
Hi,
in Dynare the difference between the state (predetermined) and jump variables is made from the timing assumption: you must write in the current period, in time ‘t’, variables that are decided upon during period t.
For flow variables, there is in general no ambiguities.
For stock variables, you must use a ‘stock at the end’ of the period concept. It is investment during period ‘t’ that sets stock at the end of period ‘t’. Be careful, there is a lot of papers that are written using ‘stock at the beginning of the period’ convention. You must then change the timing of the stock variables.
For prices, what matters is when the price is decided upon. In some wage negociation models, wages used during a period are set at the period before. You must then write wage in period ‘t’ when they are set and wage in period t-1 in the labor demand equation.
Using these conventions, it is easy to determine that state (predetermined) variables are these variables that appears with a lag in the model and jump variables are those that appears with a lead. Of course, some variables can be both jump and state variables when they appear in the model with both a lead and a lag. Finally, Dynare will also distinguish static variables that don’t appear in the model either with a lead or with a lag.
Undetermined models are still on my todo list … sorry.
Best
Michel
Thanks, Michel. Actually, that what I am guessing but some new problem comes out when I ran my model with different timing assumption, I got different error messages. All of them told me that:
Blanchard Kahn Condition is not satisfied:
But after the quote, different stuff jump out:
- Indeterminacy due to rank failure
I guess one of my equation is redundant, though I haven’t figure it out. - Indeterminacy
That is why I want to apply Farmer & Guo
3 No stable equilibrium
??? What does it mean?
So, Michel, do you have a dataset for explanation for all the error messages in dynare?
Sorry, I don’t have longer explanations of the error messages.
The Blanchard and Kahn conditions state that in order to have a unique stable trajectory you need to have as many eigenvalues larger than 1 in modulus as you have forward looking variables (variables with leads in Dynare; if leads is on two periods as in y(+2), it counts for 2). In addition, some matrix that pops up in the computation of the solution must have full rank (See, Blanchard and Kahn appendix)
These conditions can be broken two different ways, with eigenvalues more or less numerous than the forward looking variables. This leads respectively to nonexistence of a stable trajectory or to an infinity of stable trajectories (indeterminacy). That later case results also from the above rank failure.
Dynare will only proceed with computation if there exists a unique stable trajectory.
You can display the eigenvalues with the ‘check’ command.
Best
Michel