in my model I have a variable (return on short-term bond) that is defined as: r^{(1)}_t=-q^{(1)}_{t-1}. IS that considered a pre-determined variable and should I treat it in a special way (as per manual)? The manual makes an example with stock variables, so I am not entirely sure here.

Related to this, the return on the short-term bond is fixed by the central bank (via a Taylor rule), thus i_t=r^{(1)}_{t+1}. If I write this equation, stoch_simul works fine and I get sensible results. If instead of writing this equation, I try to write i_{t-1}=r^{(1)}_{t}, I get an error using stoch_simul: k_order_pert was unable to compute the solution. I think I am missing something important regarding how to properly write equations in Dynare. Thanks a lot for any help.

r^{(1)}_t=-q^{(1)}_{t-1} seems to be a definition for the contemporaneous value of r_t^{(1)}. Usually, it’s not a predetermined variable in the standard sense and you don’t need to use a special treatment. More can only be said with more information on the exact setup you are using and what q_{t-1} is.

i_t=r^{(1)}_{t+1} is different. In Dynare that would correspond to i_t=E_tr^{(1)}_{t+1}, which is probably not what you want. However, shifting the timing by one period is also not correct.

Thank you! q^{(1)}_t is the (log) price of a one-period default-free bond, while r_t^{(1)} is the definition of log return. In levels R_t^{(1)}\equiv \frac{1}{Q_{t-1}^{(1)}}.

Let me try to clarify my question. In the equations of the model, I have the definition of one-period return r_t^{(1)}=-q_{t-1}^{(1)} (Equation (1)). The monetary policy rate i_t is fixed by a Taylor rule i_t=i^*+\rho_{\pi}(\pi_t-\pi^*). Now, I need to link the monetary policy rate to either the price of the bond q_t^{(1)} or the return r_t^{(1)}. I can do it in multiple ways. If I write i_t=-q_t^{(1)} (Equation (2)), or if I write i_t=r_{t+1}^{(1)} (Equation (3)) I get the same results. If instead I write r_t^{(1)}=i_{t-1} (Equation (4)), I get the aforementioned error in stoch_simul. I do not understand why this is happening, because I thought that (1) + (4) implies (2). However, if in the model I have (2) everything is fine. If I have (4) I get an error. Thanks a lot in advance.

But how does your setup differ from e.g. the Gali (2015) textbook? There Q_t is today’s price of a bond maturing in t+1 and the interest rate is R_t=1/Q_t.

Thanks! My model is a simple Fiscal Theory of the price level model, so it differs from the standard NK model on several dimensions (introduction of a fiscal rule, presence of one-period and 2-period debt and others). But you are right, it remains true that the nominal rate set by the central bank is the inverse of the price of one-period bonds (in levels I_t=\frac{1}{Q_t}, I use I instead of R for the nominal rate set by the central bank to distinguish it from the holding period return R.). The holding period return is just a parameter defined for convenience as R^{(1)} \equiv \frac{1}{Q_{t-1}}. I provide the code, so I hope it is clear. Thanks again for the time you are spending on this. FTPL_simple.mod (6.8 KB)