# Problem with IRFs

Hi!

I’m trying to model a confidence shock ( to consumer money holdings) in a high inflation setting in a simplified NK model. I’m not able to understand why I’m unable to generate IRFs.
When I use the command stoch_simul(dr_algo=0,order=1,irf=10) y dp x r ; I get no IRFs. When I use the command stoch_simul(dr_algo=0,order=1,irf=20) ; I only get two graphs - for m (the money holding) and o (AR1 shock process).

Not sure what I’m doing wrong.

Without the files it is impossible to tell.

Hi @jpfeifer ive attached the mod file here
nkproject.mod (688 Bytes)

The reason is that your shock to `o` does not affect any other variable than `m`. You could simply delete the two equations for `o` and `m` and still would have a fully determined system. So the money stock is neutral.

Do you think non-separability in the utility function would solve that? I’m a little hesitant to do that because non-separability between consumption and money is a strong assumption, but I also want to add banks to the model and thus deposits to the household utility function and am toying with the idea of non-separability between deposits and money holdings. Although I am still unclear as to what kind of real effects that might have, considering that in the standard NK Model, the money stock is neutral.

I think you need to rethink your setup. It seems you have a normal Taylor rule in the model. In that case, the model is already closed.

Oh does that mean I can add a money demand component to my Taylor rule? I wasn’t aware I could do that. Would be very cool if I could.

Have a look at Gali’s textbook. People either have a money growth rule or a Taylor rule in the model.