Hello everyone,

I am faced with a rank failure problem and hoping some of you could help me.

I have a simple cash in advance model with production carried out using only labour and monetary policy implemented with a Taylor rule. The model works without a problem if I do not use money as an endogenous variable (setting AggResCons = 1 in line 60 in the mod file). In this case I use the aggregate resource constraint as a model equation and switch off money and tax by specifying them as equal to zero (since the model is log-linearised). However, if I use money as an endogenous variable (setting AggResCons = 0 in line 60 in the mod file) I get the rank failure error;

There are 3 eigenvalue(s) larger than 1 in modulus

for 2 forward-looking variable(s)The rank condition ISN’T verified!

In the latter scenario, I do not use the aggregate resource constraint as a model equation but use the budget constraints of households and government and the cash in advance constraint as model equations (since the aggregate resource constraint was anyway derived by using the budget constraint).

To my knowledge the timing of the equations is correct, and I am puzzled as to why the model works when we rearrange the same set of equations in one way (to get aggregate resource constraint) and why it does not when we rearrange it differently (we keep budget constraints as they are). I would be very much thankful if someone can provide any insight as to why this problem occurs.

Thank you very much.Cash_In_Advance.pdf (64.6 KB)

CIA_LL.mod (3.0 KB)