Hi Professor Pfeifer et al.,

I am trying to solve SGU monetary economy with flexible prices using a first order perturbation (Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. “Optimal fiscal and monetary policy under imperfect competition,” Journal of Macroeconomics, Elsevier, vol. 26(2), pages 183-209, June.). To do so, I use two different approaches which should be equivalent: 1) command ramsey_policy with the FONCs of the households 2) command stoch_simul with the FONCs of the planner. I attach the .mod file (stoch_simul is launched from the .m file calculating the steady state).

In each case, the model is not solved as the matrix of the static problem appears to be singular. The diagnostic points out to a colinear relationship between the FONCs with respect to debt and the FONC with respect to inflation. I suspect that price flexibility induces indeterminacy of the inflation path. However, I would have tought that with only risk-free debt, the inflation path becomes determinate. Any help about what can cause this issue would therefore be much appreciated.

PS: I wanted to upload the .mod files but it says that new users are not allowed to do so. Could you let me know how to overcome this?

Kind regards,

Charles de Beauffort