I want to estimate what is the implied interest path in Smets and Wouters (2003) model given an exogenous path for inflation and some initial conditions.
For this purpose, I am doing a perfect foresight simulation considering inflation as exogenous (i.e. within varexo) and abstracting from new realizations of every shock except the monetary policy shock, which now I consider as endogenous to keep the same number of equations and unknowns. Then, in the shock block, I impose the path of inflation I want.
The code works but the outcome is very volatile and it is extremely different from what someone might expect, especially the nominal interest rate since it is impossible to have a smooth path of inflation considering the sharp movements in R. Any idea of why this might be happening?
Attached are the codes I am using.
SW03_perf_foresight.mod (2.6 KB)