I’m trying to log-linearize the balance of payment equation in my model. I have read some papers which linearize the BoP equation, but the results of them are different in the coefficient of interest rate. I attach the file that shows my procedure and result, but it is different from others. I don’t know whether it is wrong or not. The confusing point is the deviation form of interest rate. Could you please give me some hints?
Thanks for your reply. The deviation form of net interest rate should be r_hat= r_t-rss instead of r_hat= (r_t-r_ss)/r_ss because net interest rate is a very small value. So the coefficient of r_hat should be 1 in your case. Is that right?
Yes, you are right, I forget that detail; this will make the coefficient of the net interest rate equal to 1. However, on the other hand, operating in the same way but using the gross interest rate, I get the following: