Interest rate parity/timing issue

General DSGE Modeling
1

Hello everyone,

I am still new to DSGE modeling and have been unable to identify the error in my model. I followed Mr. Mutschler’s example for the RBC model when deriving the equations. My problem is that in period 1 the different sectors have different interest rates and this equalizes in period 2. This makes the IRFs look a bit strange. If I change the timing of the interest rate parity from Ri(+1) = Rj(+1) to Ri=Rj, this leads to problems with the eigenvalues and inconsistencies. Is there a trick to adjust this or is my model incorrect?

Best regards,

Tom

m1.mod (3.2 KB)

2

There is no general answer. There is a unique timing, which depends on the setup you want to achieve, e.g. whether factors are mobile etc.