I have an error Blanchard Kahn conditions are not satisfied: indeterminacy

Stochastic simulations
1

I have a simple model like this:

var y pi r;

varexo ey epi;

parameters ly lr sigma beta k;

ly = 0.5;
lr = 0.1;
sigma = 0.06;
beta = 0.995;
k = 0.18;

model(linear);
y = y(+1) - sigma * (r - pi(+1)) + ey;
pi = beta * pi(+1) + k * y(+1) +epi;
ly * sigma * y + k * sigma * pi = lr * r;
end;

shocks;
var ey = 1;% (0.00842^2);
var epi = 1;% (0.00842^2);
end;

stoch_simul(order=1,irf=200,hp_filter=1600) y pi r;

but it turn out to be error

Error using print_info (line 45)
Blanchard Kahn conditions are not satisfied: indeterminacy

Error in stoch_simul (line 100)
    print_info(info, options_.noprint, options_);

Error in ra1 (line 130)
info = stoch_simul(var_list_);

Error in dynare (line 235)
evalin('base',fname) ;

could you help me?
thanks a lot!

2

How did you arrive at your third equation? That is usually a Taylor rule that needs to satisfy the Taylor principle, i.e. the inflation feedback on the nominal interest rate needs to be bigger than 1. In your case it is smaller than 1.

3

it’s an assignment you see
Monetary Economics Resit Assignment 2017-18R.pdf (89.3 KB)
and this is my work

image
image.png626×687 14.1 KB

4

do you mean, in this case, k * sigma / lr should bigger than 1 ?

5

This is weird.

  1. You still have a mistake in the dynamic IS equation. y does not have a (+1) attached to it. But fixing this does not affect the results.
  2. If you set lr=0 you are back to Gali (2008), Ch. 5.1.1 and everything runs as expected. But with your parameterization where the central bank cares about a smooth interest rate path, there seems to be indeterminacy.
6

ok, i see, is my work about the assignment right?

7

Of course I did not thoroughly check your computations, but a cursory look did not reveal any red flags. But I only looked at the discretionary case.

8

ok, thanks a lot, i will check it again.

9

Maybe simply ask your professor if this is the expected result?

10

i have done that… he hasn’t replyed yet…

11

my professor said one of my equation looks wrong, but i don’t know which one…

12

There are only three equations. I pointed you to a mistake in the second one. But after fixing that, the problem persists. The first two equations are standard and given on your exercise sheet. So it could only be the third one.