I am still working on the paper “Optimal monetary and fiscal policy in a currency union” by Gali and Monacelli (2008).
The model is running but I get non-zero residuals for my market clearing equations. The residuals are not even close to zero but there rather seems to be an error in my coded equations.
Can anybody explain me why these residuals are non-zero and how to solve this problem?
Thank you very much!
g_m_2008.mod (7.98 KB)
My guess is because you are mixing linearized and level equations. For example, your equation (4) is equation (25), but it should most probably be (26)
Dear Prof. Pfeifer,
thank you for your reply. I first tried to use Eq. 26 but then I was unsure how to correctly specifiy it in my code.
How do I find the steady states value of y, c and g in order to use Eq 26 and express these variables as deviations from their steady state?
You need to start from the nonlinear model. Unfortunately, that is not easy.