Issue with Collinearity in a simple Nonlinear NK Model Implementation

[jpfeifer]

I am not surprised. See the threads at

New Keynesian Model in Understanding DSGE

I have never worked with that book, but whenever people post about it, they report issues. I agree with all your points. The one equation is redundant and the linearization seems wrong.

and

Computing Marginal Cost in NK DSGE models with Dynare

Hello everyone, Please help me out with the following. In NK models, the (FOCs) equations for factors demand by the individual (monopolistically competitive) intermediate firms INCLUDE marginal cost. We basically have something like this: 1.Y = Y(K, L, KG) : Production function 2. K = a.MC.(Y/R) : Dde for K 3. L = (1-a).MC.(Y/W) : Dde for L These three equations fixe K, L and MC (Y comes from the Demand side). Now, we could derive the MC equation but it would be REDUNDANT unless we replace…