One of my equations is as follows:
I linearized this equation:
and wrote its dynare code in the same way.
The error that dynare pointed out to me was as follows:
WARNING: you have declared your model ‘linear’ but you are using a function (max, min, abs, sign) or an operator (<, >, <=, >=, ==, !=) which potentially makes it non-linear.
My first question is whether my linearization is correct? In fact, I did not consider the maximum in the linearization. I do not think this is correct !!!
My second question is, should I consider the model nonlinear?
Is there a similar model with dynare code available that I can use?
No, your linearization is not correct as you do not take into account the derivatives of max/min. According to the manual:
Note that these functions are differentiable everywhere except on a line of the 2-dimensional real plane defined by a=b. However for facilitating convergence of Newton-type methods, Dynare assumes that, at the points of non-differentiability, the partial derivative of these functions with respect to the first (resp. the second) argument is equal to 1 (resp. to 0) (i.e. the derivatives at the kink are equal to the derivatives observed on the half-plane where the function is equal to its first argument).
The error message you get is due to the fact that you have
model(linear) in your mod file, which, as you are using max or min operators is not correct, because this introduces nonlinearity into your model.
Regarding examples on how to introduce max/min (or better using mcp tags and the lmmcp solver), you can have a look at our mod files in our testsuite:
Just to ask you a quick follow up question: does max/min do the exact same as
mcp tag when it comes to solving
In effect, yes. But the model needs to be set up with the appropriate complementarity condition for the algorithm to work.