How to force the Selic rate to be 1 percentage point higher for the first 4 periods and then follow the Taylor rule in Dynare?

Perfect foresight simulations
1

Hi everyone!

I’m trying to model the dynamics of the Selic rate in Dynare. My goal is to force the Selic rate to be 1 percentage point higher than the value indicated by the Taylor rule for the first 4 periods, and after that, have it follow the Taylor rule equation as usual.

I was thinking of using a deterministic shock to add this 1 percentage point difference, but I’m not sure how to implement it correctly. Here’s what I’ve tried so far:

  1. Create an exogenous variable e_choque_selic to add the shock of 1 percentage point for the first 4 periods.
  2. Modify the Selic equation to include this shock only for periods 1 to 4.
  3. Make the Selic rate return to the Taylor rule behavior starting from period 5.

How can i do it?

Thanks for your help!

2

Let me ask what you mean with

Is that higher than the value indicated by the Taylor rule with the additional percentage point or without it?

3

Hi professor,

It is without it.

To clarify, professor, the higher interest rate by a fixed 1 percentage point for four consecutive quarters and just then the interest rate follows the Taylor rule.

I have the .mod file for this model. It helps if i send it?

IMG_9197
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4

You could try an indicator variable as in The zero lower bound issue in deterministic simulations - #7 by asprilqjs