I am trying to simulate (using Dynare 4.0.4.) a non linear deterministic model imposing the zero lower bound on the nominal interest rate. To this purpose, I added in the model section of the mod file
max(1,(1+int)/(1/bet) - (infl)^1.5)
where int is the nominal interst rate, bet is the subjective discount factor and infl is the inflation rate.
PROBLEM: when running the simulation, I obtain:
MODEL SIMULATION :
1 - err = NaN
Time of iteration :0.266
10 - err = NaN
Time of iteration :0.125
Total time of simulation :1.56
WARNING : maximum number of iterations is reached (modify options_.maxit).
If I write a negative number in the first argument of the max function, e.g.
max(-0.1,(1+int)/(1/bet) - (infl)^1.5)
the simulation goes through.
If I solve the model without imposing the zero lower bound constraint, there are no problems in the simulation (apart the negativity of the nominal interest rate in some periods!!)
What might be the problem? and the solution?