Land normalised to 1

Dear all,

I am currently working with a DSGE model which includes land, like the one by Iacoviello and Neri. In these models land becomes part of the optimisation problem of entrepreneurs/firms. I have derived the first order conditions and steady states, in which I normalise the value of land to 1.

Before I start entering the model into dynare, I wanted to ask how I have to deal with this normalisation of land. Do I have do declare land as a model variable and set it later equal to 1 in the model block? Or what would be the correct procedure?

I would be grateful for any help I could get regarding this issue.


The most foolproof way is to directly impose that land is normalized to 1. That is: derive the FOCs with land as a variable and then impose that L=1. That way, land will drop from all FOCs and will not be a variable anymore.

Thanks Johannes, I will follow your foolproof approach.