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

Anders

The code I’m using is:

//Preamble

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;

//Model

model;

a = p(+1);

y = -b1*rho +b2*(p - a(-1)) + e;

y = a1*rho - a2*r - 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 = h*p + (1-h)*(s + p_f);

u = csigma*u(-1) + eps;

end;

//Initial values

initval;

a = 0;

y = 0;

rho = 0;

p = 0;

r = 0;

s = 0;

i = 0;

q = 0;

u = 0;

end;

steady;

//Shocks

shocks;

var eps;

stderr 0.02;

end;

stoch_simul(order=2, irf=40);