Non-Linear Model

[Vannak]

Dear,

I am new to Dynare. Is it true that we need to take exponential for all variables in order to express them in non-linear form? For example, Y = C + I. Do I need to express it as exp(Y)= exp© + exp(I) in dynare for it to recognise that it is in levels instead of log-linearised form?

Or I only need to take exponential when only I mix both linearised and non-linear equations?

Regards

[DoubleBass]

Hello Vannak,

it is not true that you have to do that in order to type a non-linear model into dynare. It is possible to enter equations in both ways you described.
Dynare actually calculates a linearization of the model-equations that you type in. What follows is that if you give it the equation as Y = C + I and when you then use stoch_simul it calculates absolute deviations from the non-stochastic steady state. The ‘trick’ with exp(Y) = exp( C) + exp(I) is that dynare then does a log-linearization for you and you will receive percentage deviations form steady state after you do stochastic simulations.
This is the reason many enter the model-equations that way, as they rather be interpreting percentage deviations.

Best

[jpfeifer]

See also

Question about understanding irfs in dynare

To be more precise: it depends on how the variables in your model are measured. As @stepan-a says, Dynare conducts a linearization. If you for example have a nonlinear model and your model variable is simply the level of output, the IRF will measure the difference between the variable and its steady state (or its mean at higher order). This is the case with https://github.com/DynareTeam/dynare/blob/master/examples/example1.mod In contrast, if your model variable already measures percentage…