Model diagnostics in the replication of Gali and Monacelli (2005)

1

Dear All,

When I replicate Gali and Monacelli (2005) paper using the code DSGE_mod/Gali_Monacelli_2005/Gali_Monacelli_2005.mod at master · JohannesPfeifer/DSGE_mod · GitHub and run model diagnostics check, it says that

MODEL_DIAGNOSTICS: The Jacobian of the static model is singular
MODEL_DIAGNOSTICS: there is 3 colinear relationships between the variables and the equations
Relation 1
Colinear variables:
p
ph
e
Relation 2
Colinear variables:
p
ph
e
Relation 3
Colinear variables:
p
ph
e
Relation 1
Colinear equations
7 8 9 16 17 18

Relation 2
Colinear equations
7 8 9 16 17 18

Relation 3
Colinear equations
16 18

MODEL_DIAGNOSTICS: The singularity seems to be (partly) caused by the presence of a unit root
MODEL_DIAGNOSTICS: as the absolute value of one eigenvalue is in the range of ±1e-6 to 1.
MODEL_DIAGNOSTICS: If the model is actually supposed to feature unit root behavior, such a warning is expected,
MODEL_DIAGNOSTICS: but you should nevertheless check whether there is an additional singularity problem.
MODEL_DIAGNOSTICS: The presence of a singularity problem typically indicates that there is one
MODEL_DIAGNOSTICS: redundant equation entered in the model block, while another non-redundant equation
MODEL_DIAGNOSTICS: is missing. The problem often derives from Walras Law.

So, my question is that should the collinearity and singularity be of concern or shall we disregard them?

Thank you very much in advance for your comment.

2

That message is expected and no cause for concern. It is well-known that nominal variables in an inflation targeting regime feature a unit root. That will trigger the warning you encounter.

3

Thank you very much!