Implementation of Taylor-Rule

Hi there,

I’m a student at Copenhagen University studying economics.
I’m writing my bachelor at the moment and as a part of this I’m using Dynare to run a model from Walsh’s book “Monetary Theory and Policy”.
The model simulates a small open economy and I want it to mimic the Swedish economy. I therefore need to add a classic Taylor-Rule (equation 7).
The variables are defined by Walsh as log deviations around their steady state - therefore the steady state values being 0.
The problem is that when I add the Taylor-Rule, the whole model breaks down and won’t give me any output concerning the demand shock I’ve implemented.
It seems to work fine when I use an LM equation instead of a Taylor-Rule but the latter is essential to the analysis.
Can anyone of you help me out?

Kind regards

The code I’m using is:
var y rho p r s i q u a;
predetermined_variables p;
varexo e eps r_f p_f i_f;
parameters b1 b2 a1 a2 c h k csigma it;

b1 = 0.36;
b2 = 0.31;
a1 = 0.019;
a2 = 0.41;
c = 0.81;
h = 0.31;
k = 0.6;
it = 0.0;
csigma = 0.9;

a = p(+1);
y = -b1rho +b2(p - a(-1)) + e;
y = a1rho - a2r - u;
rho = r_f - r + rho(+1);
rho = s + p_f - p;
r = i - p(+1) + p;
i = r_f + (p(+1) - p) + k*(p - p(-1) - it);
q = hp + (1-h)(s + p_f);
u = csigma*u(-1) + eps;

//Initial values
a = 0;
y = 0;
rho = 0;
p = 0;
r = 0;
s = 0;
i = 0;
q = 0;
u = 0;

var eps;
stderr 0.02;

stoch_simul(order=2, irf=40);

I am not familiar with your model, but it seems you cannot simply close it by assuming a Taylor rule of the form you have. You should try to understand the economic intuition behind you model.