I would be very grateful for some hints regarding the price level in a log-linearized NKM. I understand that Dynare requires stationarity in order to solve/simulate the model and that this is problematic with the price level.
How would you incorporate the price level in the model block, for example when one would like to modify the CB rule such that it targets the price level instead of inflation?
Suppose I have a standard log-lin block:
y = y(+1) - sigma^(-1) * ( i - pi(+1) - rn ); // DIS pi = beta * pi(+1) + kappa * y + s_pi; // NKPC rn = rho + sigma * psi * ( rho_a-1 ) * a; // Natural rate i = rho + phi_pi * pi + shock_i; // CB rule y = a + ( 1 - alpha ) * n; // Production function m = pi + y - theta * i; // Money demand (and AR(1) for shocks: s_i, s_pi)
Thank you a lot!