New Keynesian Model tradables and nontradables

I first tried to build a new Keynesian model in a closed economy with two-sector goods (tradables and nontradables). The endogenous variables are deviations from the steady state. Labour is the only production factor. Calvo price setting. The model is driven by technology shock.

But there is a problem with the closed one in Dynare that I cannot find anything wrong.

After that, I will expand the closed one to be a small open economy.

Thank you so much
Sicong
logdfss_closed_nktnt_n.mod (2.2 KB)

Dear SicongM,

you are using a linearized model, I think it is not necessary to use the initval block since steady states will be known as zero (due to model(linear)) .

When you invoke stoch_simul you can also skip the option order=1 (due to model(linear)).
Why do you make use of the option hp_filter=100?

Your problem is that one of the eigenvalues is close to 0/0, so you might solve it by using a different calibration.

Dear Max1,

Thank you for your response.
hp_filter=100 means annually. I can change it to hp_filter=1600 that means quarterly.

The one-sector closed NK model works well. So I applied the same parameters to this two-sector closed NK model.

I modified the blocks of the model but there is the same problem that one of the eigenvalues is close to 0/0.

I simply borrowed calibration from the textbook by Jordi Gali (second edition).

I assume that a fraction of tradable consumption (phi) is 0.75,
so the fraction of nontradable consumption (1-phi) is 0.25.

Please find out the new mod-file.

logdfss_closed_nktnt_n.mod (1.8 KB)

You have one redundant equation that says

cnthat = cnthat;

That means your equation system is missing one piece of information to compute the variables endogenously.

Dear Prof. Pfeifer,

Thank you for pointing out my typo. I have changed it to:
“cnthat = ynthat;”.

Also, I made a mistake to define the standard deviation: sigma_at.

Now, all good.

Now, I have extended the previous model to a small-open-economy New Keynesian model with Tradables and Non-Tradables. Government spending is financed by the lump-sum tax.

When I run the mod-file, the problem is:
"There are 5 eigenvalue(s) larger than 1 in modulus
for 4 forward-looking variable(s)

The rank condition ISN’T verified!"

logdfss_soe_nktnt_ng.mod (2.2 KB)

That is hard to tell. Focus on what you changed. I find your demand functions strange. Usually, only relative prices and inflation rates appear. But in your model, there is a price level p showing up.