Impossible to find the steady state: Non-linear NK model with capital, price and wage rigidity

Dear forum,

I am trying to run a non-linear New Keynesian model with both price and wage rigidities and capital. I am unable to get to model running and getting the typical error of Unable to find steady state. It will be really helpful if any one can provide some insight about the errors.

Best,
Deb
NK_nonlinear_capital.mod (10.7 KB)

Your steady state does not solve the marginal rate of substitution equation. You need to fix that. The problem is that you have price levels in your model, which introduces a unit root and prevents the steady state from being endogenously computed.

Thank you for your comment. I have tried to express equations in real terms. It still didn’t solve the steady state. Fortunately, it gave some results. The problem is Y_t is dropping on impact after a TFP shock whereas C_t is increasing. Can you please help me to understand where things went wrong? I appreciate very much your help.

Best,
Deb
NK_nonlinear_capital.mod (9.3 KB)

When I run the file, I get an error in the steady state. Did you upload the correct file?

Sorry, I have uploaded a wrong .mod file where I used initial values instead of a steady state model. The IRFs are from this model, with initial values. I apologise for the mistake. The one with the steady state model is still not working.

best,
Deb
NK_nonlinear_capital.mod (11.7 KB)

The usual way to proceed is to shut off features and see where the effect comes from. Examples are interest rate smoothing and output feedback.

Thank you very much Prof. Pfeifer. Indeed the model worked after setting \phi_R = 0. I have added costly capital adjustment afterwards and the model worked even with \phi_R \ne 0.