# Jermann Quadrini (2012) with collateral constraints **URL:** \ **Category:** Stochastic simulations\ **Created:** [19 July 2024 08:21 UTC](https://forum.dynare.org/t/jermann-quadrini-2012-with-collateral-constraints/26121 "2024-07-19T08:21:46Z")\ **Posts on this page:** 8\ **Page:** 1
**Author:** ![kurama](https://forum.dynare.org/letter_avatar_proxy/v4/letter/k/a4c791/32.png) [@kurama](https://forum.dynare.org/u/kurama)\ **Post date:** [19 July 2024 08:21 UTC](https://forum.dynare.org/t/jermann-quadrini-2012-with-collateral-constraints/26121/1 "2024-07-19T08:21:46Z")
Hi all, I am trying to solve the NK version of Jermann Quadrinni’s (2012) paper with collateral constraints. I modify the constraint to be Kyotaki-Moore style instead of earning constraint. I double-checked my code to make sure that variables have proper timing (in particular capital), but still get the same error “Blanchard & Kahn conditions are not satisfied: indeterminacy.” and “The rank condition ISN’T verified!”. Could someone help me? [simple\_model.mod](https://forum.dynare.org/uploads/short-url/3VVLpfJCx5qsv6wgi5LC4fQTcVJ.mod) (8.8 KB) [simple\_model\_steadystate.m](https://forum.dynare.org/uploads/short-url/yuI2PcOzWhIvc6Ce9v0MuoY7l5r.m) (4.4 KB) ---
**Author:** ![kurama](https://forum.dynare.org/letter_avatar_proxy/v4/letter/k/a4c791/32.png) [@kurama](https://forum.dynare.org/u/kurama)\ **Post date:** [19 July 2024 15:00 UTC](https://forum.dynare.org/t/jermann-quadrini-2012-with-collateral-constraints/26121/2 "2024-07-19T15:00:07Z")
I thin I resolved the issue. It was a problem with calibration. ---
**Author:** ![kurama](https://forum.dynare.org/letter_avatar_proxy/v4/letter/k/a4c791/32.png) [@kurama](https://forum.dynare.org/u/kurama)\ **Post date:** [20 July 2024 20:42 UTC](https://forum.dynare.org/t/jermann-quadrini-2012-with-collateral-constraints/26121/3 "2024-07-20T20:42:05Z")
Hi all, I think the main issue in this model is that the nominal prices (price of consumption goods and wages) are moving to a new equilibrium after the monetary shock. And Taylor rule breaks. I have attached the updated code and IRFs. I used the version of the Taylor rule, which only reacts to the output gap. Does anyone have an intuition about why the price doesn’t return to equilibrium after the shock? Is it a feature of the model, or did I make a mistake somewhere? [simple\_model.mod](https://forum.dynare.org/uploads/short-url/aqkTRwAsmWTYcX7pPGr47Ge44gY.mod) (9.5 KB) [simple\_model\_steadystate.m](https://forum.dynare.org/uploads/short-url/isWrGO1lOILLvzXpIz0jlDlNQpq.m) (4.7 KB) [main\_output\_gap.fig](https://forum.dynare.org/uploads/short-url/aLvX40jf6SFtfLGDXg2krfTSOy2.fig) (175.8 KB) [qwd\_output\_gap.fig](https://forum.dynare.org/uploads/short-url/pwXQcGj4aMtDIVI7nOkMnp6YoMK.fig) (64.7 KB) ---
**Author:** ![jpfeifer](https://forum.dynare.org/user_avatar/forum.dynare.org/jpfeifer/32/5044_2.png) [@jpfeifer](https://forum.dynare.org/u/jpfeifer)\ **Post date:** [22 July 2024 07:46 UTC](https://forum.dynare.org/t/jermann-quadrini-2012-with-collateral-constraints/26121/4 "2024-07-22T07:46:41Z")
See e.g. > [@Levels versus Growth Rates](https://forum.dynare.org/t/levels-versus-growth-rates/5652/2): > > It is well-known that the price level is indeterminate. You can choose any initial level for P and get the same results. A corrolary of this is that the price level has a unit root. While inflation goes back to steady state, this does not apply to the price level. While the IRF will be nice and smooth, it will not return to the initial steady state. Whenever there is a unit root in the model, you will get a collinearity warning in model\_diagnostics (which is actually a feature of this model in t… ---
**Author:** ![kurama](https://forum.dynare.org/letter_avatar_proxy/v4/letter/k/a4c791/32.png) [@kurama](https://forum.dynare.org/u/kurama)\ **Post date:** [22 July 2024 13:11 UTC](https://forum.dynare.org/t/jermann-quadrini-2012-with-collateral-constraints/26121/5 "2024-07-22T13:11:53Z")
Thank you! I get it now. Another question:what can be a reason that the original Taylor rule doesn’t work, while a simplified version works? When I switch to the ```auto rho_R*(r_taylor(-1)-steady_state(r_taylor))+(1-rho_R)*nu_1*(P-P(-1))+((1-rho_R)*nu_2+nu_3)*(Y-steady_state(Y))-nu_3*(Y(-1)-steady_state(Y))-eps_r-(r_taylor-steady_state(r))=0; ``` I get Blanchard & Kahn conditions are not satisfied: no stable equilibrium. ---
**Author:** ![jpfeifer](https://forum.dynare.org/user_avatar/forum.dynare.org/jpfeifer/32/5044_2.png) [@jpfeifer](https://forum.dynare.org/u/jpfeifer)\ **Post date:** [22 July 2024 13:25 UTC](https://forum.dynare.org/t/jermann-quadrini-2012-with-collateral-constraints/26121/6 "2024-07-22T13:25:02Z")
That’s hard to tell. But the determinacy/stability region can be complicated in larger models. ---
**Author:** ![kurama](https://forum.dynare.org/letter_avatar_proxy/v4/letter/k/a4c791/32.png) [@kurama](https://forum.dynare.org/u/kurama)\ **Post date:** [22 July 2024 16:00 UTC](https://forum.dynare.org/t/jermann-quadrini-2012-with-collateral-constraints/26121/7 "2024-07-22T16:00:25Z")
Also, I notices that although all real variables are going into the write direction, the Price and Wage go in opposite. An increase in real interest rate leads to an increase in inflation. Can it be the results of altered taylor rule, or something is definitely wrong in the model? ---
**Author:** ![jpfeifer](https://forum.dynare.org/user_avatar/forum.dynare.org/jpfeifer/32/5044_2.png) [@jpfeifer](https://forum.dynare.org/u/jpfeifer)\ **Post date:** [22 July 2024 16:35 UTC](https://forum.dynare.org/t/jermann-quadrini-2012-with-collateral-constraints/26121/8 "2024-07-22T16:35:57Z")
That indeed sounds a bit strange. But it’s hard to tell whether it’s a feature of the model or a bug. Have you tried moving your model more closely to the original model, e.g. by changing parameters? That may give you new insights.