Jermann Quadrini (2012) with collateral constraints

[jpfeifer]

See e.g.

Levels versus Growth Rates

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…