Dear all,
Currently I am estimating a rather standard closed-economy New-Keynesian DSGE model. I deviate by including quadratic adjustment costs for household holdings of government bonds. The coefficient in front of these adjustment costs is pretty crucial for my paper for later use in a model version with financial frictions. When I do not estimate the coefficient in front of the quadratic adjustment costs my estimation nicely converges. However, when I ask Dynare to also estimate this coefficient, I can only estimate when the prior of the coefficient is set at very small values, as otherwise the BK-conditions are violated, and I can no longer estimate this parameter. When I set the prior at a small value, the mode cannot be found, however, and I can see from the mode-figures that dynare wants to move into the part of the parameter space with larger values for this coefficient (but where BK-conditions are violated).
I was wondering whether there is something wrong in my code, or whether this is a more structural problem. My guess is the last, as I have carefully followed the estimation instructions of professor Pfeifer’s estimation guide, but a mistake can ofcourse be in a small corner.
If it is indeed a structural feature of my model, for which there are also economic reasons, does anybody have an idea how I can adjust the model/estimation procedure such that I can estimate this parameter? It is pretty crucial for the rest of my paper that I have an estimated value for this parameter.
attached you find a zip-file with all the matlab files and the data.
NK_estimation_adjustment_costs.zip (30.5 KB)
I would be very grateful if anybody can help.