I am trying to compute the optimal monetary policy for a New Keynesian model with financial frictions. I derive the objective (loss) function by taking a second order approximation of households utility.
Dynare shows no errors when I compute the stochastic simulations and the Ramsey policy (I have avoid the standard mistake of command steady; on Ramsey policy)
BUT errors appear only when I compute the discretionary policy. Particularly, I get the message:
Error using print_info (line 117)
Discretionary policy: NaN elements are present in the solution. Procedure failed.
Some useful remarks:
I understand that under discretionary policy, the objective function must be purely quadratic. In my model the objective function it involves terms in square, like x^2 but also correlation of variables, like xy. Is this the problem? All terms must be in the form of x^2 ? If this is the case, then can you suggest anything about how to solve under discretion when I have terms like xy ?
I run the model_diagnostics but it doesn’t give back anything! (so it seems that there is not obvious error?)
Thank you very much in advance.