Problem with multisector NK model

Dear all,

I’m currently running a multisector NK model with Calvo pricing and two processing stages (intermediate input firms and final goods firms).

I’m encountering two problems:

  1. If I use the input-output matrix that I estimated (no final goods are used as intermediate inputs, therefore several rows are = 0 in the matrix) I get indeterminacy of Blanchard & Khan conditions. Am I missing something in the conditions of calibration?

  2. Once I replace the 0 entries with an arbitrarily small number to proceed with estimation, I’m getting the following error:

initial_estimation_checks:: The forecast error variance in the multivariate Kalman filter became singular.
initial_estimation_checks:: This is often a sign of stochastic singularity, but can also sometimes happen by chance
initial_estimation_checks:: for a particular combination of parameters and data realizations.
initial_estimation_checks:: If you think the latter is the case, you should try with different initial values for the estimated parameters.

ESTIMATION_CHECKS: There was an error in computing the likelihood for initial parameter values.
ESTIMATION_CHECKS: If this is not a problem with the setting of options (check the error message below),
ESTIMATION_CHECKS: you should try using the calibrated version of the model as starting values. To do
ESTIMATION_CHECKS: this, add an empty estimated_params_init-block with use_calibration option immediately before the estimation
ESTIMATION_CHECKS: command (and after the estimated_params-block so that it does not get overwritten):

Error using initial_estimation_checks (line 159)
Error using initial_estimation_checks (line 159)
initial_estimation_checks:: The forecast error variance in the multivariate Kalman filter became
Error in dynare_estimation_1 (line 164)
oo_ =
Error in dynare_estimation (line 105)
Error in dy_code.driver (line 36581)
Error in dynare (line 293)
evalin(‘base’,[fname ‘.driver’]) ;

I tried removing some varobs to avoid linear relationship between the observables but also did not work.

I wonder if anyone has encountered this problem before and could pls help.

Best regards,

dy_code.mod (13.8 KB)