Hello everyone! I am experiencing some issues with the productitvity’s IRF. The model I am working with is based on Mendoza (1991) that involves two shocks: productivity and external interest rate (both AR(1)).

When I set only the shock of productivity, everything seems to work well and the external interest rate remains constant. However, when I set only the shock to interest rate, the shock to productivity seems to move as well, even though I did not set any shock on it. I noticed this in the oo_irfs of the productivity, which indicates it deviates from its steady state.

I would appreciate any help or advice on how to resolve this issue. Thank you!

model_cons.mod (4.7 KB)

Can you provide the file producing the problem. The attached one only features terms of trade, not productivity.

Thank you for your response, Professor. I have attached the file for your reference. In the model, ‘e’ represents the productivity disturbance, while ‘n’ represents the external rate disturbance. Additionally, ‘e_e’ and ‘e_n’ refer to their respective exogenous shocks.

model_cons_1.mod (4.7 KB)

But productivity `e`

clearly does not move.

When I examine the vector oo_.irfs.e_e_n, I notice that it has non-zero values. Isn’t it expected that the productivity disturbance ‘e’ should remain in a steady state and therefore its IRFS vector should be filled with zeros when the external interest rate shock is introduced?

They are in the order of `1e-18`

, i.e. numerically indistinguishable from 0.

Thank you very much for the clarification Professor!