Hi, I’ve always solved this deterministic model with zero lower bound on nominal interest rates because it is immediate to write this constraint and the impulse responses are exactly as I expect. However, by removing the ZLB (first equation), the impulse responses are really weird, even if the model solves correctly (I suppose). Why does it happen ? Thanks

Ok, I think I’ve got it: since the nom.int.rate is not constrained by the ZLB, the central bank can reduce it to fully accomodate the negative demand shock. That’s why I see that gdp doesn’t fall. This should be the explanation.

Hi, one more question: I’m removing the shock to d and leaving only that to eta. There is something I don’t understand: I have one sequence with eta=0.2 and a second sequence with eta=0.202. If I set the shock in periods, say, 4:6, why do the second sequence changes from period 1 ?

I don’t understand the question. Please provide an example file.

Ok. see the attached file gshock1. As you can see at line 74, I have commented out the shock to d. However, at line 109, I set a shock to eta from period 6 to 8. Now take a look at the 2 sequences generated, geta and gdpeta. You will see that both gdp and g vary from the first period in the second sequence, the one where eta=0.202. Why ?

You are simulating under perfect foresight. Agents will know that a shock happens at time 4 and will of course react to that today. Do you mean this?

Yes, you are right, I forgot agents have perfect foresight. With regard to the first question about dynamics without zero lower bound, am I right ? Thanks

That could be, but without knowing your model, it is impossible to tell for sure.