I have encountered something strange when I ran my code: the deviation of interest rate from its steady state is very large (about 20%) in the irf plot under a Taylor Rule monetary policy shock, besides the deviation of labor is about 80% and the output about 20%, which is quite abnormal in practical.
I have never met this situation before. What might be the mistakes of the code ?
The shock in the code is set as:
shocks;
var e_R; stderr 0.0360;
and the Taylor Rule is set as:
exp(RU) = RUU^(1 - rhoRUU )
* (exp(RU(-1)))^rhoRUU
* (exp(piU)/piUU)^( rhopiUU*(1-rhoRUU) )
* (exp(GDPU)/exp(GDPU(-1)))^( rhoGDPUU*(1-rhoRUU) )
* (1-e_R);
That’s hard to tell. Try simplifying your Taylor rule to see where the problem comes from, e.g. run a version without interest rate smoothing and output feedback.
Dear Professor Pfeifer,
Under your advice, I respectively set rhoRUU=0 and rhoGDPUU=0 and both. The results are almost the same.
Besides, the interest rate RU has a positive deviation under the negtive montery policy shock, which is also very strange.
I really have no idea where the problem comes from. Would you please give some advice ?
I changed rhopiUU and find that the deviation of ouput is declined to 4% or so ( the deviations of other variables seems normal as well) when rhopiUU=4.
However, in this case the value of inflation feedback rhopiUU seems a bit too large as it is always estimated between [1, 2]. What might be the problem ?
Any advice will be appreciated ! Thank you for your time !