MIU Model with capital adjustment costs and seigniorage

Hello everyone.

Im doing a model on Dynare than includes money, capital adjustment cost and seigniorage following for the most part section 9.4 of the ABCs of RBCs from McCandless.

Apart from that, I want to simulate 3 different shocks.

I already check my equations and the ss model and everything is on line with the book, however when I try to run my .mod it says that:

"Error using print_info
The steadystate file did not compute the steady state

Error in steady (line 102)
print_info(info,options_.noprint, options_);

Error in ejemplo2_parcial.driver (line 245)

Error in dynare (line 281)
evalin(‘base’,[fname ‘.driver’]);"

Professor Johannes told me that I have to de trend but I don’t know what’s the best way to do it or if I have to put something like “stoch_simul(irf=100, order=1, HP_FILTER)” on the last line of the code.

Any help will be much appreciate.
ejemplo2_parcial.mod (3.5 KB)

It seems you are trying to run the model with a trend in money growth. That will not work without modifications. In Section 9.3 \bar g=1, so M_{t+1}=M_t in steady state. That is not the case anymore in Section 9.4. For that reason, you need to properly detrend the model. Otherwise, no steady state exists. Putting hp_filter in stoch_simul does not solve the steady state issue, because the approximation about the steady state comes first. The typical way to proceed is to express the model as a function of real balances and inflation, i.e. replace \frac{M_{t-1}}{P_t}=\frac{M_{t-1}}{P_{t-1}}\frac{P_{t-1}}{P_t}=\frac{M^{real}_{t-1}}{\pi_t}. In the end, neither the trending money stock nor price level will remain in the model.

1 Like

Thanks professor. I think I finally get what you suggested.