I have written a small open economy code with bond market included. It is assumed that there’s incomplete asset market so that the rest of world is not allowed to hold domestic bonds (so no international risk sharing). According to Schmitt-Grohe & Uribe (2002), I include portfolio adjustment costs to ensure there’s stable equilibrium (theoretically). However, I still cannot produce the output with stable equilibrium. I am sure the timing is correct. Can somebody help me? It is driving me crazy.
Please see the attachment. Thank you so much in advance.
file5.mod (5.23 KB)
My guess is that the bond timing is wrong. Bonds are typically predetermined variables
Prof @jpfeifer …can you check out this file…BK condition is not verified…I have tried many things but I always get stuck…
I have run dynare sensitivity process to check if I have to change some parameters value but nothing.
Could you suggest me some clue to tackle such issu
Thanks in advance
dsge_mada4.mod (24.8 KB)
Usually, that means ere is a timing error somewhere. When you set
phipi = 0.5;
which normally leads to indeterminacy, the file will run. Thus, there is either a timing problem or a an issue with your monetary-fiscal interactions. In the latter case, you are in an active fiscal-passive monetary regime, i.e. you have the fiscal theory of the price level.