# Indeterminacy problem with a simple new keynesian model with capital

Hi all!
I am currently trying to model a very simple New Keynesian model with endogenous capital accumulation as laid out in ‘On the Mechanics of New Keynesian Models’ by Peter Rupert and Roman Sustek.
It consists of the following 10 equations:

``````w/c         = l^eta;
1/c         = beta*1/c(+1)*(1+i)/(1+pie(+1));
1/c         = beta*1/c(+1)*(1+r(+1)-delta);
y           = k(-1)^alpha*l^(1-alpha);
w/r         = (1-alpha)/alpha*k(-1)/l;
chi         = (r/alpha)^alpha*(w/(1-alpha))^(1-alpha);
i           = steady_state(i)+nu*pie + xi;
xi          = rho_xi*xi(-1)+e;
y           = c+k-(1-delta)*k(-1);
``````

the 7th equation is a consequence of the assumption of sticky prices. Replacing it with chi = steady_state(chi) yields a model with flexible prices, for chi denotes marginal costs, and if prices can be adjusted in any case, the level of the marginal costs is a function of the elasticity of substitution between the various goods.
Running the flexible prices model works flawlessly. However, running the sticky prices model generates weird behaviour: The standard algorithm does not find a steady-state at all. Specifying solve_algo=1 yields a solution, which, however, violates the Blanchard and Kahn condition and is indeterminate.
Could anybody point me to what could cause this?

PS: If my post looks familiar, this might be because I posted a question on the very same replication attempt a few days ago. In retrospect, I feel like my first question was quite nonsensical. However, I do not have the rights to delete it. Is this how it is supposed to be?

Best regards,
jb99
nk_capital.mod (1.2 KB)

1. You are still trying to compute things endogenously that cannot be computed endogenously. In the background you have the Fisher equation. The file
nk_capital.mod (1.1 KB) should fix some of the issues.
2. The file runs when I modify `alpha` to a small value. So there must still be a mistake somewhere.
3. We typically keep posts online even after they have been superseded, as other people profit even from “dumb” questions.