Including Oil in Small Open Economy (Gali & Monacelli, 2005)


I am extremely new to DSGE modelling and dynare itself and so would appreciate any help that anybody can offer. I am trying to include oil in the consumption of the small open economy and its production too. I have made the necessary adjustments to the code, but when I run it, I get the following error:

Warning: Matrix is singular to working precision.

In evaluate_steady_state at 85
In resol at 104
In stoch_simul at 88
In gmt7 at 335
In dynare at 180
Error using print_info (line 80)
The steady state contains NaN or Inf
Error in stoch_simul (line 98)
print_info(info, options_.noprint, options_);
Error in gmt7 (line 335)
info = stoch_simul(var_list_);
Error in dynare (line 180)
evalin(‘base’,fname) ;

Can somebody please help me understand what this error is? I would be extremely thankful!

Many thanks in advance!

Equation 20 must be wrong as it has a non-zero residual. Your linearization must be wrong. Use

to see this.

Thank you very much Sir. I had fixed the problem by removing a constant which had been wrongly mentioned.

However, I have another question. I further augmented the initial model by adding oil into the production block. I have attached the mod file for the same below.

  1. When I impose a domestic technology shock, I find that output improves and the output gap falls. However, consumption falls sharply to as much as 100 points.
  2. When I impose a shock to the foreign oil prices, although output declines, output gap also declines and consumption seems to be rising.

These are extremely puzzling! Would you have some insight regarding this? I would be thankful for any help offered.

Sorry, but nobody will be able to help you here. This is your model and you set it up in a particular way. You must find out what the intuition is and where you went wrong in your implementation.

I understand what you mean, Sir. It is all part of the learning process, I guess!

Many thanks again!