Dear all,

We have a most probably trivial question, but one we are not able to solve. We are trying to to solve the Basic NK model in its linear form in Dynare. Please find below the code. The problem is most probably either

- in the monetary policy rule (where we have to refer to a steady state of output but not sure how one does that in the linear equation - where you cannot refer to a gap variable in terms of deviations from steady). In a sense, in this equation:

//13. Monetary policy rule

(1+i)=betta^(-1)*(P/P(-1))^(phi_pi)*(Y/Y(-1))^(phi_y)*exp(v);

We just refer to last periody Y, this is wrong I believe, it should refer to Ybar but not sure how to define Ybar in the non-linear model (and in which part). Can one refer to a steady_state value (defined in the preprocessing part) in the model part? Can I write Y/Y_st in the model part for the output gap? it does not seem so.

Alternatively, it can be that only our initial steady state values are pretty bad (wasnt sure what they should be in the linear version) and this is why we do not converge, but I doubt all the equations are correct in our current versions to converge to a solution.

Would be extremely grateful for any help!

NK_nonlin.mod (3.0 KB)